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CALDERWOOD & HARKNESS LLP 555 California Street, 40th Floor San Francisco, California 94104

PRIVILEGED AND CONFIDENTIAL ATTORNEY-CLIENT COMMUNICATION / ATTORNEY WORK PRODUCT

PRIVILEGED AND CONFIDENTIAL — ATTORNEY-CLIENT PRIVILEGE / ATTORNEY WORK PRODUCT DOCTRINE — This memorandum has been prepared by Calderwood & Harkness LLP at the request of the Audit Committee of the Board of Directors of Torchlight Mining Corp. for the purpose of providing legal advice regarding litigation reserve analysis. It is protected from disclosure by the attorney-client privilege and/or the work-product doctrine. Do not distribute without prior approval of Calderwood & Harkness LLP.

MEMORANDUM

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I. Executive Summary

The purpose of this memorandum is to advise the Audit Committee of the Board of Directors of Torchlight Mining Corp. ("TMC" or the "Company") on the appropriate litigation reserve to be established and maintained by TMC in connection with the ongoing investigation by the Antitrust Division of the United States Department of Justice ("DOJ") into suspected price-fixing, market allocation, and bid-rigging in the North American specialty-minerals sector. The investigation is being conducted through Grand Jury No. GJ-22-0194 in the United States District Court for the Northern District of California, San Francisco Division.

Based on our comprehensive review of the current stage of the investigation as of October 15, 2022, our analysis of TMC's potential financial exposure under the applicable penalty framework, our assessment of the probability and estimated range of loss under both ASC 450 (U.S. GAAP) and IAS 37 (IFRS), and our consideration of mitigating factors including TMC's cooperation posture and the preliminary status of the affected-commerce analysis, we conclude that the initial litigation reserve of USD 30 million established in March 2022 — which was disclosed in TMC's fiscal year 2021 annual report filed on March 28, 2022 — remains appropriate and adequate at this time.

This conclusion, however, is necessarily subject to revision as the investigation progresses and as additional facts are developed through our ongoing internal investigation, the DOJ's continued document review and witness activity, and the economic analysis being prepared by Hargrove Forensic Advisory LLC. Calderwood & Harkness will provide updated reserve analyses to the Audit Committee on a quarterly basis, or more frequently as circumstances warrant, including upon the occurrence of material developments such as the filing of charges, the commencement of plea or resolution discussions, or the receipt of additional substantive communications from the DOJ.

This analysis has been conducted in close coordination with TMC's independent auditor, Calvert & Associates LLP (engagement partner Daniel Moreau), and TMC's Chief Financial Officer, Richard Fong, to ensure that the reserve methodology and conclusions are consistent with TMC's financial-reporting requirements under both U.S. GAAP and IFRS. Calvert & Associates has been provided with a summary of our analysis framework and has confirmed that the approach set forth herein is consistent with applicable accounting standards.

II. Background — The DOJ Investigation

A. Overview of the Investigation

On February 10, 2022, the Antitrust Division of the United States Department of Justice formally opened a grand jury investigation, designated Grand Jury No. GJ-22-0194, in the United States District Court for the Northern District of California, San Francisco Division. The investigation concerns suspected violations of Section 1 of the Sherman Antitrust Act, 15 U.S.C. § 1, specifically price-fixing, market allocation, and bid-rigging in the North American specialty-minerals sector. The products at issue include high-purity feldspar, industrial talc, and rare-earth concentrates — commodity and specialty mineral products that are sold to customers in the ceramics, coatings, plastics, electronics, and defense-supply industries, among others.

The investigation is being conducted by the DOJ Antitrust Division's San Francisco Field Office, located at 450 Golden Gate Avenue, Room 10-0101, San Francisco, California 94102, under the supervision of the Division's Criminal Enforcement Section at the DOJ's headquarters in Washington, D.C. The lead prosecutors assigned to the matter are Trial Attorney Denise Kowalski and Senior Trial Attorney Marcus Reeves, both of the San Francisco Field Office. The investigation is being supervised by Deputy Assistant Attorney General Julia Stafford-Hayes, who oversees criminal enforcement matters within the Antitrust Division. The involvement of the DAAG's office in direct supervision of the matter suggests that the DOJ considers the investigation to be of significant scope and priority within its criminal enforcement docket.

Based on our interactions with the prosecution team and our review of the grand jury subpoena materials, the investigation appears to encompass the full scope of the North American specialty-minerals market for the identified products, with a particular focus on pricing conduct, customer allocation arrangements, and bid coordination in connection with government and large-volume commercial procurement solicitations during the period from approximately January 2017 through at least August 2021.

B. TMC's Involvement

TMC's involvement in the investigation commenced with the service of Grand Jury Subpoena No. GJ-22-0194-SD-003 on TMC's registered agent for service of process in the Northern District of California on February 14, 2022, four days after the investigation was formally opened. The subpoena called for the production of a broad range of documents, including pricing correspondence, customer lists, bid submissions, meeting calendars, electronic communications (including text messages, instant messages, and communications through encrypted messaging platforms), travel records, and corporate policy documents relating to the Company's U.S. Specialty Minerals Division. The subpoena also identified a number of custodians by name, including Gavin Holt, Sandra Chu, Thomas Eriksen, and several other current and former employees of the U.S. Specialty Minerals Division.

Upon receipt of the subpoena, TMC's General Counsel, Priya Anand, promptly contacted Calderwood & Harkness LLP for outside antitrust defense representation. Calderwood & Harkness was formally engaged on February 18, 2022, pursuant to an engagement letter executed by Ms. Anand on behalf of TMC.

On May 20, 2022, TMC received a target letter from the DOJ Antitrust Division, signed by Trial Attorney Denise Kowalski and Senior Trial Attorney Marcus Reeves, advising TMC that it is a "target" of the grand jury investigation. The receipt of a target letter is a significant procedural development in federal criminal investigations. While a target letter does not itself constitute a charge, it indicates that the DOJ has identified TMC as a person or entity as to which the prosecutor possesses substantial evidence linking it to the commission of a crime and who, in the judgment of the prosecutor, is a putative defendant. The issuance of the target letter materially elevated the severity of the investigation as it pertains to TMC and was a key factor in our assessment of the probability of an adverse financial outcome, as discussed in Section V below.

TMC's U.S. Specialty Minerals Division — the division at the center of the investigation — is headquartered in Reno, Nevada, and operates mining and processing facilities in Nevada, California, and Montana. The Division generated approximately USD 687 million in revenue in fiscal year 2021, accounting for approximately 20% of TMC's consolidated revenue of approximately CAD 4.27 billion (approximately USD 3.38 billion at prevailing exchange rates). The Division's products are sold to over 400 customers across North America, with significant concentrations in the ceramics, electronics, and defense-supply sectors. The financial significance of the Division to TMC's overall operations underscores the materiality of the investigation and the importance of maintaining an appropriate litigation reserve.

C. Co-Subjects and Cooperating Witnesses

The DOJ investigation encompasses multiple companies in the North American specialty-minerals sector. Based on our discussions with the prosecution team, publicly available information, and intelligence gathered through informal channels in the antitrust defense bar, we have identified the following companies as co-subjects, targets, or cooperating parties in the investigation:

Ridgecrest Minerals Inc. Ridgecrest is a Delaware corporation headquartered in Denver, Colorado. It reported fiscal year 2021 revenue of approximately USD 1.92 billion and is a portfolio company of Marlowe Asset Management Peak Capital Partners LP, a mid-market private equity firm based in New York. Ridgecrest received a DOJ target letter on or about January 12, 2022 — approximately one month before TMC received its subpoena — which suggests that Ridgecrest may have been identified as a target at an earlier stage of the investigation. Ridgecrest is represented in the investigation by Davenport, Kline & Archer LLP. We have had limited but cordial communication with Ridgecrest's counsel regarding logistical matters (such as joint-defense privilege issues and document-production timelines), but have not entered into a formal joint-defense agreement with Ridgecrest at this time, and the question of whether such an agreement would be strategically appropriate remains under evaluation.

Pinnacle Earth Resources Ltd. Pinnacle is a corporation organized under the laws of Ontario, Canada, and is headquartered in Sudbury, Ontario. It reported fiscal year 2021 revenue of approximately CAD 1.45 billion (approximately USD 1.15 billion at prevailing exchange rates). Pinnacle is a co-subject in the investigation and is represented by Ashford Whitmore LLP. Pinnacle's status as a target versus a subject is not known to us with certainty, though certain indications suggest it may currently hold subject status. The distinction is relevant because it may affect the DOJ's allocation of culpability among the alleged co-conspirators and, consequently, the penalties each entity faces.

Cascade Chemical Supply Co. Cascade is a Washington corporation headquartered in Spokane, Washington. Cascade is a smaller participant in the specialty-minerals sector and entered into a cooperation agreement with the DOJ Antitrust Division on or about September 15, 2021 — approximately five months before the grand jury investigation was formally opened. It was Cascade's cooperation with the DOJ that triggered the broader investigation into the specialty-minerals sector. Cascade is represented by Whitfield, Strauss & Tully LLP. We understand that Cascade has been providing the DOJ with documents, testimony, and proffer sessions as part of its cooperation obligations. The nature and extent of the evidence that Cascade has provided to the DOJ is not fully known to us, but we assess with a high degree of confidence that Cascade's cooperation has been a primary driver of the DOJ's case development.

D. Alleged Conduct

Based on our review of the grand jury subpoena, the target letter, informal communications with the prosecution team, and our internal investigation to date, the DOJ alleges that from approximately January 2017 through at least August 2021 — a period of approximately four years and eight months — senior commercial personnel at TMC, Ridgecrest, and Pinnacle engaged in an unlawful agreement to fix prices, allocate customers, and rig bids for high-purity feldspar, industrial talc, and rare-earth concentrates sold to customers in North America.

The individuals alleged to have been the principal participants in the conspiracy are:

• Gavin Holt, former Vice President of U.S. Specialty Minerals Sales at TMC (employed at TMC from March 2014 through September 30, 2021);

• 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 DOJ alleges that the coordination among these individuals occurred through multiple channels, including:

• In-person meetings at the quarterly conferences of the North American Specialty Minerals Council ("NASMC"), which took place at various locations including Arlington, Virginia; Scottsdale, Arizona; and Orlando, Florida. These conferences provided regular opportunities for face-to-face contact among the alleged co-conspirators under the guise of legitimate industry engagement;

• Encrypted messaging via the VaultChat application, a commercially available end-to-end encrypted messaging platform that is designed to leave no persistent message history on the user's device. The use of an encrypted, auto-deleting messaging platform to conduct pricing discussions is a significant factor in the DOJ's assessment of culpability, as it suggests consciousness of the impropriety of the communications; and

• Occasional telephone calls, both to domestic and international numbers, the records of which have been obtained by the DOJ through grand jury subpoenas to telecommunications providers.

The alleged conduct includes specific agreements to coordinate pricing for high-purity feldspar sold to ceramics manufacturers, to allocate certain rare-earth-concentrate customers between TMC and Ridgecrest (with Pinnacle receiving allocations in certain industrial-talc product segments), and to rig bids submitted in response to procurement solicitations issued by U.S. government agencies and defense-sector prime contractors.

E. Key Individual — Gavin Holt

Gavin Holt is the former Vice President of U.S. Specialty Minerals Sales at TMC and is the individual most directly implicated in the alleged pricing communications. As noted above, Holt was employed by TMC from March 2014 through September 30, 2021. His resignation from TMC became effective on September 30, 2021, approximately four and a half months before the DOJ formally opened the grand jury investigation and approximately two weeks after Cascade Chemical Supply Co. entered into its cooperation agreement with the DOJ. The timing of Holt's resignation has been noted by the prosecution team, though we are not aware of any evidence that Holt had actual knowledge of Cascade's cooperation at the time of his resignation.

Following the commencement of the investigation and the receipt of the target letter, TMC's counsel reached out to Holt through professional channels to request his voluntary cooperation with the Company's internal investigation. Holt retained personal counsel, Patrick Dunleavy of Briarcliff Law Group PLLC in San Francisco, on or about June 10, 2022. Through Mr. Dunleavy, Holt indicated that he would not voluntarily participate in TMC's internal investigation. Holt declined TMC's request for an interview through his counsel on August 5, 2022.

On June 14, 2022, Holt appeared before the grand jury pursuant to subpoena and asserted his Fifth Amendment privilege against self-incrimination, declining to testify. The invocation of Fifth Amendment privilege is, of course, Holt's constitutional right, and no adverse inference may be drawn from it in a criminal proceeding. However, Holt's refusal to cooperate with both the grand jury and TMC's internal investigation limits our ability to assess the full scope of his conduct and, consequently, TMC's potential exposure.

Holt is the individual most directly implicated in the alleged pricing communications. Our internal investigation has identified him as the primary TMC participant in contacts with competitor personnel, and the 37 documented communications referenced in Section V.A below all involve Holt. No other current or former TMC employee has been identified to date as a direct participant in inter-competitor pricing discussions, though several employees (including Sandra Chu, Director of U.S. Specialty Minerals Pricing) received instructions from Holt that may have been informed by his contacts with competitors.

F. Current Status of Investigation (as of October 2022)

The investigation remains in its active, pre-charging phase. The following summarizes the key procedural milestones and the current status of both the DOJ investigation and TMC's internal investigation as of the date of this memorandum:

Document Preservation and Collection. TMC issued a company-wide litigation hold on March 1, 2022, covering all documents and electronically stored information potentially relevant to the investigation. Data collection commenced on March 15, 2022, through Redstone Digital Forensics Inc. ("Redstone"), an electronic-discovery and forensic-data vendor retained by Calderwood & Harkness on TMC's behalf. Redstone has collected data from 38 custodians, including current and former employees, as well as from shared network drives, email servers, and enterprise resource planning systems.

Document Production. The first rolling production to the DOJ, consisting of approximately 42,000 documents, was made on April 4, 2022. Additional rolling productions have been made on a regular basis since August 2022 and are projected to continue through completion by approximately December 2022. As of the date of this memorandum, the cumulative document production to the DOJ comprises approximately 350,000 documents. Based on the remaining custodian collections and processing queues, the final cumulative production is expected to total approximately 487,000 documents. All productions have been accompanied by privilege logs identifying documents withheld on the basis of attorney-client privilege and/or attorney work product.

Internal Investigation. Calderwood & Harkness's internal investigation is ongoing. We have planned a total of 23 employee interviews, a number of which have been completed. Key interviews conducted to date include:

• Sandra Chu, Director, U.S. Specialty Minerals Pricing (interviewed July 18, 2022);

• Thomas Eriksen, Regional Sales Manager, U.S. Specialty Minerals Division (interviewed July 22, 2022);

• Priya Anand, General Counsel, TMC (interviewed August 12, 2022);

• Richard Fong, Chief Financial Officer, TMC (interviewed August 19, 2022).

As noted in Section II.E above, Gavin Holt declined TMC's request for an interview on August 5, 2022, through his personal counsel. The remaining planned interviews are scheduled to be completed by late November or early December 2022, with a full presentation of internal investigation findings to the Board of Directors scheduled for January 20, 2023.

Expert Economic Analysis. TMC retained Hargrove Forensic Advisory LLC on July 1, 2022, under the direction of Dr. Vanessa Tremblay, a forensic economist specializing in antitrust damages and affected-commerce quantification. Hargrove has been engaged to analyze pricing patterns in the specialty-minerals market during the alleged conspiracy period, to assess the volume of affected commerce attributable to TMC, and to evaluate the potential overcharge (if any) resulting from the alleged conduct. Hargrove's preliminary analysis is expected in Q1 2023, and its work product will be critical to refining the reserve estimate at that time.

Cooperation Posture. TMC communicated its willingness to cooperate with the DOJ investigation through a formal letter from Calderwood & Harkness to Trial Attorney Denise Kowalski dated June 8, 2022. The letter outlined TMC's commitment to full and timely document production, to making current employees available for interviews as requested by the DOJ, and to providing ongoing factual presentations to the prosecution team as TMC's internal investigation progresses. The DOJ has acknowledged TMC's cooperation posture but has not yet made any formal assessment of cooperation credit. The degree of cooperation credit that TMC ultimately receives will be a significant factor in determining the final penalty amount.

Charges. No charges have been filed against TMC or any current or former TMC employee as of the date of this memorandum. The timing of any potential charges is uncertain but, based on the pace of the investigation and the remaining document production, we do not anticipate the filing of charges or the commencement of formal resolution discussions before mid-2023 at the earliest.

III. Applicable Accounting Standards

The litigation reserve analysis for the DOJ investigation must be conducted under two applicable financial-reporting frameworks, as TMC reports its financial results under both U.S. Generally Accepted Accounting Principles ("U.S. GAAP") and International Financial Reporting Standards ("IFRS"). TMC is a Canadian corporation listed on the Toronto Stock Exchange and cross-listed on the New York Stock Exchange as a foreign private issuer, filing annual reports on SEC Form 40-F. Accordingly, TMC's financial statements must satisfy the requirements of both frameworks with respect to the recognition, measurement, and disclosure of contingent liabilities arising from the DOJ investigation.

A. ASC 450 (Contingencies) — U.S. GAAP

Under Accounting Standards Codification Topic 450 ("ASC 450"), formerly Statement of Financial Accounting Standards No. 5 ("SFAS No. 5"), a loss contingency must be accrued when two conditions are met:

(i) Information available prior to the issuance of the financial statements indicates that it is probable that a liability has been incurred at the date of the financial statements; and

(ii) The amount of the loss can be reasonably estimated.

The term "probable" as used in ASC 450-20-25 is generally interpreted by the accounting profession and the SEC staff as indicating a likelihood threshold of approximately 75% or greater — that is, the event is likely to occur. This is a higher threshold than the "more likely than not" standard applied under IFRS (discussed below), and the distinction between these thresholds has practical implications for TMC's dual-GAAP reporting.

If a loss is determined to be only "reasonably possible" — defined as a likelihood that is more than remote but less than probable — then disclosure of the contingency is required in the notes to the financial statements, but accrual is not. If the loss is determined to be "remote" — meaning the chance of the loss occurring is slight — neither accrual nor disclosure is required.

Where the conditions for accrual are met and a range of loss is estimable, but no single amount within the range is a better estimate than any other amount, ASC 450-20-30 provides that the minimum amount in the range should be accrued. This is a significant provision in the context of the present analysis, as it permits the accrual of a reserve at the low end of the estimated range when, as here, the ultimate outcome is subject to significant uncertainty and no single point estimate can be identified with confidence. Disclosure of the full range, including any amounts in excess of the accrued amount, is required in the notes to the financial statements.

B. IAS 37 (Provisions, Contingent Liabilities and Contingent Assets) — IFRS

Under International Accounting Standard 37 ("IAS 37"), an entity is required to recognize a provision — the IFRS equivalent of a loss accrual — when three conditions are met:

(i) There is a present obligation (legal or constructive) as a result of a past event;

(ii) It is probable that an outflow of resources embodying economic benefits will be required to settle the obligation; and

(iii) A reliable estimate of the amount of the obligation can be made.

Critically, the term "probable" as used in IAS 37 is defined as "more likely than not," which is generally interpreted as a likelihood threshold of greater than 50%. This is a materially lower threshold than the "probable" standard under ASC 450 (approximately 75% or greater). The consequence of this divergence is that a contingency may require provision recognition under IAS 37 before it requires accrual under ASC 450, and TMC's financial reporting team must manage this difference in the preparation of its dual-GAAP financial statements.

Where there is a continuous range of possible outcomes and each point in the range is as likely as any other, IAS 37 requires recognition at the "best estimate" of the expenditure required to settle the present obligation. For a single obligation, the best estimate is the most likely outcome. Where the provision involves a large population of items, the best estimate is determined by weighting all possible outcomes by their associated probabilities — that is, the expected value or probability-weighted average. Unlike ASC 450, which permits accrual at the minimum of the range when no better estimate exists, IAS 37 directs the entity to accrue at the best estimate, which may be at or near the midpoint of the range.

The difference in measurement methodology between ASC 450 and IAS 37 creates a situation in which the IAS 37 provision may need to be larger than the ASC 450 accrual for the same contingency. In the present case, however, the significant uncertainties at this early stage of the investigation and the broad range of possible outcomes provide sufficient basis for the current USD 30 million reserve under both frameworks, as discussed in Section VI below.

C. Coordination with Calvert & Associates LLP

TMC's independent auditor, Calvert & Associates LLP ("Calvert"), has been consulted throughout the reserve analysis process to ensure that the methodology and conclusions are consistent with applicable accounting standards and with Calvert's expectations as the external auditor. Daniel Moreau, the engagement partner at Calvert responsible for the TMC audit engagement, has reviewed the general framework of the reserve analysis (without receiving this privileged memorandum) and has confirmed that the approach is consistent with both ASC 450 and IAS 37 requirements.

Calvert has requested that Calderwood & Harkness provide periodic audit-response letters regarding the status and potential financial impact of the investigation, in accordance with AU-C Section 501 (Audit Evidence — Specific Considerations for Selected Items) and the American Bar Association's Statement of Policy Regarding Lawyers' Responses to Auditors' Requests for Information (the "ABA Treaty"). Calderwood & Harkness has provided an initial audit-response letter and will provide updated letters in connection with each subsequent reporting period. These letters are carefully drafted to provide the auditor with sufficient information to assess the adequacy of the reserve without inadvertently waiving privilege or disclosing attorney mental impressions or work product.

Calvert concurs that the reserve analysis framework set forth herein is consistent with both ASC 450 and IAS 37 requirements and has not raised any objections to the current reserve level of USD 30 million, while acknowledging (as we do) that the reserve is subject to reassessment as the investigation progresses.

IV. Analysis of Potential Financial Exposure

A. DOJ Penalty Framework — Sherman Act Criminal Fines

The statutory framework for criminal fines in antitrust cases is governed by Section 1 of the Sherman Antitrust Act, 15 U.S.C. § 1, and the Alternative Fines Act, 18 U.S.C. § 3571(d). Under Section 1 of the Sherman Act, a corporation convicted of a price-fixing, market-allocation, or bid-rigging offense faces a maximum fine of USD 100 million per count. However, under the Alternative Fines Act, 18 U.S.C. § 3571(d), the maximum fine may be increased to twice the gross gain derived from the offense by the defendant, or twice the gross loss caused to the victims of the offense, whichever is greater. In practice, the Alternative Fines Act substantially increases the maximum fine exposure in cases involving large volumes of affected commerce, and fines exceeding the USD 100 million statutory cap have been imposed in several high-profile antitrust cases in recent years.

The DOJ Antitrust Division's standard methodology for calculating recommended fines in criminal antitrust cases is based on the U.S. Sentencing Guidelines, specifically Section 2R1.1 (Bid-Rigging, Price-Fixing or Market-Allocation Agreements Among Competitors). Under the Sentencing Guidelines, the base fine is calculated as 20% of the volume of affected commerce attributable to the defendant during the period of the violation. This base fine is then adjusted upward or downward based on a series of culpability factors, including:

• The involvement or tolerance of the offense by high-level personnel or substantial authority personnel;

• The defendant's prior history of criminal or regulatory violations;

• Whether the defendant violated an order, injunction, or condition of probation;

• Whether the defendant obstructed justice;

• The effectiveness of the defendant's pre-existing compliance program;

• Whether the defendant self-reported the offense;

• The extent and timeliness of the defendant's cooperation with the investigation; and

• The defendant's acceptance of responsibility and implementation of remedial measures.

The resulting fine range is presented to the sentencing court as a recommendation, and the court retains discretion to impose a fine within or outside the Guidelines range based on the factors set forth in 18 U.S.C. § 3553(a). In practice, negotiated plea agreements or non-prosecution agreements ("NPAs") typically specify the agreed-upon fine amount, which the court generally accepts.

B. Affected Commerce Estimate

The volume of affected commerce is the critical variable in the penalty calculation. Based on information provided by the DOJ in the course of the investigation and our preliminary internal analysis, the DOJ estimates total affected commerce — defined as the aggregate U.S. sales of high-purity feldspar, industrial talc, and rare-earth concentrates by all alleged co-conspirators during the period from approximately January 2017 through August 2021 — at approximately USD 1.34 billion.

TMC's share of 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. Specialty Minerals Division's sales data for the relevant product categories during the relevant time period, as compiled by TMC's finance team and reviewed by Calderwood & Harkness.

It is important to note that these figures are preliminary and are subject to refinement. Several factors may cause the affected-commerce figure to be adjusted, either upward or downward, as the investigation progresses:

• Hargrove Forensic Advisory LLC is conducting an independent economic analysis of pricing patterns and affected-commerce volumes. Dr. Tremblay's preliminary analysis is expected in Q1 2023, and it may produce a figure that differs materially from the DOJ's current estimate.

• The DOJ's affected-commerce figure may include products or time periods that TMC may be able to argue should be excluded (for example, certain rare-earth-concentrate sales that were made pursuant to long-term fixed-price contracts that were not subject to the alleged price-fixing conduct).

• The precise start and end dates of the alleged conspiracy are subject to dispute; any narrowing of the conspiracy period would reduce the affected-commerce figure proportionally.

We will update the affected-commerce estimate as additional data becomes available and as Hargrove's analysis matures.

C. Potential Penalty Range

Based on the affected-commerce estimate set forth above and the DOJ's standard penalty methodology, we have constructed the following range of potential penalties for TMC:

Base Fine Calculation. TMC's share of affected commerce (USD 478 million) multiplied by the Sentencing Guidelines' 20% base-fine percentage yields a base fine of approximately USD 95.6 million.

Maximum Statutory Exposure. Under the Alternative Fines Act, the maximum fine could theoretically exceed USD 100 million if twice the gross gain or twice the gross loss exceeds that amount. A calculation of twice the gross gain or loss is speculative at this stage, as it would require a determination of the overcharge attributable to the alleged conspiracy, which is precisely the type of analysis that Hargrove Forensic Advisory is being retained to perform. For purposes of this analysis, we note the theoretical possibility that the maximum exposure could exceed USD 100 million but do not assign a specific dollar figure to this scenario.

Realistic Range Considering Cooperation and Mitigating Factors. In practice, the DOJ routinely grants cooperation credit and reductions for mitigating factors, resulting in fines that are substantially below the base fine. Based on our experience in comparable antitrust investigations and our assessment of TMC's cooperation posture, compliance program, and remedial actions, we estimate the following realistic penalty range:

The high-end scenario assumes that TMC receives only limited cooperation credit — for example, if the DOJ determines that TMC's cooperation was untimely or incomplete, or that TMC failed to take adequate remedial actions. This scenario would also contemplate the possibility that the DOJ assigns a higher culpability score to TMC based on the involvement of a vice president-level executive (Gavin Holt), who may be deemed "substantial authority personnel" within the meaning of the Sentencing Guidelines.

The mid-range scenario assumes moderate cooperation credit consistent with TMC's current posture of voluntary cooperation, timely document production, and willingness to make employees available for DOJ interviews, balanced against the fact that TMC did not self-report the offense and that Holt's conduct arguably reflects a failure of internal controls.

The low-end scenario assumes that TMC achieves maximum cooperation credit, potentially including credit for implementing a comprehensive antitrust compliance program (which TMC has not yet done but which we recommend), for terminating the responsible personnel (Holt resigned prior to the investigation, but TMC could take additional disciplinary actions), and for providing substantial assistance to the DOJ in its prosecution of other targets.

Individual Fines. Gavin Holt's potential individual fine exposure under the Sherman Act (up to USD 1 million per count, or higher under the Alternative Fines Act) is not included in the entity reserve and is carved out from this analysis. Holt's personal liability is a matter between Holt and his personal counsel and the DOJ, and TMC has no obligation or intention to indemnify Holt for criminal fines.

D. Civil Litigation Exposure

It is well established in the antitrust enforcement landscape that criminal price-fixing convictions or guilty pleas by corporate defendants routinely trigger follow-on civil antitrust class-action litigation. Under the Clayton Antitrust Act, 15 U.S.C. § 15, private plaintiffs who have been injured by an antitrust violation are entitled to recover treble damages (three times the actual damages suffered), plus reasonable attorneys' fees and costs. A criminal conviction or guilty plea constitutes prima facie evidence of the antitrust violation in a subsequent civil action under 15 U.S.C. § 16(a), effectively eliminating the need for the private plaintiff to independently prove the existence of the conspiracy.

If TMC is able to avoid a criminal conviction through a non-prosecution agreement, the NPA would not constitute a per se basis for civil liability. Unlike a guilty plea or a conviction, an NPA is not an admission of criminal conduct that triggers the prima facie evidence provision of Section 16(a). However, private plaintiffs could still pursue civil antitrust claims based on independently gathered evidence, and the existence of the DOJ investigation and any public disclosures regarding the investigation would provide a roadmap for private litigation.

Civil exposure is not included in the litigation reserve analysis at this time. No follow-on civil antitrust actions have been filed to date against TMC or any of the other alleged co-conspirators, and the filing of such actions is unlikely until the DOJ investigation reaches a public resolution (whether through charges, a guilty plea, an NPA, or a declination). If and when civil litigation is filed, a separate reserve analysis will be conducted and presented to the Audit Committee. We note, however, that civil antitrust damages in price-fixing cases can be substantial — in recent comparable cases, civil settlement amounts have ranged from 10% to 25% of affected commerce — and the Audit Committee should be prepared for the potential need for a significant additional reserve if civil claims materialize.

E. Professional Fees

While professional fees are generally expensed as incurred and are not included in the litigation reserve under ASC 450 or IAS 37 (unless they relate directly to the contingent loss itself), we note them here for context and for the Audit Committee's financial planning purposes.

The following are our current estimates of total professional fees through resolution of the matter:

These estimates are based on current assumptions regarding the scope and duration of the investigation and are subject to revision. In particular, if the matter proceeds to trial rather than a negotiated resolution, legal fees could increase substantially. Additionally, if civil litigation is filed, separate defense counsel and experts will likely be required, generating additional fees not reflected in the estimates above.

As noted, professional fees are not included in the USD 30 million litigation reserve. They are expensed as incurred in accordance with TMC's accounting policies and are reflected in TMC's general and administrative expense line item in the applicable reporting periods.

V. Assessment of Probability of Loss

A. Probability Analysis Under ASC 450 ("Probable")

The threshold question under ASC 450-20-25 is whether it is "probable" — generally interpreted as approximately 75% or greater — that TMC will incur a loss in connection with the DOJ investigation. We have assessed this question by considering the totality of the facts and circumstances known as of the date of this memorandum, including the following key factors:

Target Letter. TMC has received a target letter from the DOJ Antitrust Division, indicating that the DOJ has identified TMC as a putative defendant and possesses substantial evidence linking TMC to the commission of a criminal antitrust violation. While the receipt of a target letter does not guarantee that charges will be filed, it significantly increases the assessed probability that the DOJ will seek some form of resolution — whether through a criminal charge, a plea agreement, or a non-prosecution agreement — that will involve a monetary payment by TMC. In our experience, the issuance of a target letter to a corporate entity in a criminal antitrust investigation results in a monetary resolution in the substantial majority of cases.

Documentary Evidence from Internal Investigation. Our internal investigation, while not yet complete, has revealed at least 37 documented communications between Gavin Holt and his competitor counterparts — Carl Edgerton of Ridgecrest and Kevin Tsang of Pinnacle — conducted through VaultChat messages recovered from backup systems, in-person meeting records reconstructed from travel and expense reports, and NASMC conference registration and attendance records. These communications span the period from approximately March 2017 through July 2021 and include discussions of pricing for high-purity feldspar, customer assignments for industrial-talc accounts, and bid coordination for specific government and commercial procurement solicitations. The substance and frequency of these communications are consistent with the DOJ's allegations of a sustained price-fixing, market-allocation, and bid-rigging conspiracy.

Sandra Chu's Interview. Sandra Chu, Director of U.S. Specialty Minerals Pricing at TMC, was interviewed on July 18, 2022. Chu confirmed that she received pricing-adjustment instructions from Gavin Holt on at least 12 occasions during the relevant period that called for price increases to specific customers at specific times. Chu stated that she was not aware of the reasons for these pricing instructions and implemented them in the ordinary course of her responsibilities. Our subsequent analysis has revealed that on each of the 12 occasions identified by Chu, the competitor pricing for the same products to the same or similar customers moved in a substantially similar direction within a narrow time window, which is consistent with coordinated pricing behavior. While there is no direct evidence that Chu had knowledge of Holt's inter-competitor communications, the pattern of pricing instructions she received provides corroborative evidence of the alleged conspiracy's implementation within TMC.

Cascade's Cooperation. The existence of Cascade Chemical Supply Co.'s cooperation agreement with the DOJ, which was executed approximately five months before the grand jury investigation was formally opened, strongly suggests that the DOJ possesses corroborative evidence from Cascade's files and personnel that extends beyond what TMC's own documents reveal. Cascade, as a direct participant in the alleged conspiracy, would have had its own records of pricing discussions and customer-allocation agreements, as well as testimony from its personnel regarding the nature and extent of the coordinated conduct. While we have not been able to review Cascade's cooperation proffers, the DOJ's decision to open a full grand jury investigation and to issue target letters to multiple companies indicates a high level of confidence in the evidence obtained through Cascade's cooperation.

Holt's Fifth Amendment Invocation. While no adverse inference may be drawn from Holt's invocation of the Fifth Amendment in the grand jury proceeding, his refusal to cooperate with TMC's internal investigation deprives TMC of a potential source of exculpatory or mitigating evidence. If Holt possessed information that could support a defense — for example, evidence that his communications with competitors were innocent or that they did not result in actual price coordination — his unwillingness to share that information with TMC means that such evidence is unavailable to support TMC's position.

Assessment. Considering the totality of these factors — the target letter, the documentary evidence of inter-competitor pricing communications, the corroborative pricing patterns identified in connection with Sandra Chu's testimony, the existence of a cooperating witness (Cascade), and the absence of any identified affirmative defense — we conclude that it is "probable" (as that term is used in ASC 450-20-25) that TMC will incur a loss in connection with the DOJ investigation, whether through a criminal fine, a monetary payment under a non-prosecution agreement, or other form of resolution. We estimate the probability of an adverse monetary outcome at approximately 80–85% as of the date of this memorandum.

B. Probability Analysis Under IAS 37 ("More Likely Than Not")

Under IAS 37, the applicable probability threshold is "more likely than not," which is generally interpreted as a likelihood of greater than 50%. Applying the same facts and circumstances discussed in Section V.A above, the conclusion under IAS 37 is even more clear: it is significantly more likely than not that TMC will incur an outflow of economic resources in connection with the DOJ investigation. Our assessed probability of approximately 80–85% comfortably exceeds the 50% threshold.

Accordingly, both accounting standards are satisfied, and TMC is required to recognize a provision (under IAS 37) and an accrual (under ASC 450) for the estimated loss arising from the DOJ investigation.

VI. Reasonableness of the USD 30 Million Reserve

A. Establishing the Range

As set forth in Section IV.C above, our estimated range of potential monetary exposure for TMC in connection with the DOJ investigation is approximately as follows:

• Low end: approximately USD 38 million (assuming maximum cooperation credit and significant mitigating factors, with a 50–60% reduction from the base fine);

• Mid-range: approximately USD 48–57 million (assuming moderate cooperation credit, with a 40–50% reduction from the base fine);

• High end: approximately USD 72 million (assuming limited cooperation credit, with approximately a 25% reduction from the base fine).

This range is based on our current affected-commerce estimate of USD 478 million, the 20% base-fine methodology, and our assessment of the cooperation credit and mitigating factors that may be available to TMC. The range does not include the maximum statutory exposure under the Alternative Fines Act, which we view as unlikely given the DOJ's standard approach to penalty calculations in negotiated resolutions.

However, several factors introduce significant uncertainty into this analysis at this early stage of the investigation (October 2022, approximately eight months after the commencement of the investigation and only five months after receipt of the target letter):

• The internal investigation is not complete. Calderwood & Harkness has completed interviews of several key witnesses but has additional interviews planned, and the full picture of Holt's conduct and its implementation within TMC is not yet known. Additional mitigating or aggravating facts may emerge.

• The affected-commerce figure is preliminary. Hargrove Forensic Advisory's independent economic analysis is not yet complete. Dr. Tremblay's work may produce an affected-commerce figure that differs materially — potentially in either direction — from the DOJ's preliminary estimate. In particular, TMC may be able to argue that certain product categories or customer relationships should be excluded from the affected-commerce calculation, which could reduce the base fine.

• The degree of cooperation credit is unknown. TMC has communicated its willingness to cooperate, and the cooperation process is underway, but the DOJ has not yet formally assessed TMC's cooperation. The degree of credit that TMC ultimately receives will depend on the completeness and timeliness of TMC's cooperation, TMC's willingness to enter into a resolution agreement, and the DOJ's assessment of the value of TMC's cooperation relative to the cooperation provided by other targets and subjects.

• Possibility of a favorable resolution. While increasingly unlikely given the receipt of the target letter and the strength of the evidence identified to date, it remains possible that the investigation could be resolved without any monetary payment by TMC. This could occur if TMC can successfully demonstrate to the DOJ that Gavin Holt acted outside the scope of his authority and that TMC lacked institutional knowledge of the alleged conduct — a defense that, while difficult to sustain, is not without precedent in criminal antitrust enforcement. The probability of this outcome is low (we estimate it at approximately 10–15%), but it is not so remote as to be disregarded in the reserve analysis.

• No charges have been filed. The investigation has not yet resulted in the filing of any charges against TMC or any TMC employee. While the target letter strongly suggests that charges or a negotiated resolution are likely, there remains a possibility — however small — that the investigation may not result in prosecution of TMC.

B. Application of ASC 450 — Minimum of Range

Under ASC 450-20-30, when a range of loss is estimable and no single amount within the range is a better estimate than any other amount, the minimum amount in the range should be accrued. The entity is then required to disclose the full range, including amounts in excess of the accrued amount, in the notes to the financial statements.

Applying this standard to the present analysis, the low end of the realistic penalty range is approximately USD 38 million (assuming maximum cooperation credit and significant mitigating factors). A reserve of USD 30 million is facially below the low end of that range. However, the ASC 450 range is not limited to the "realistic penalty range" — it must encompass the full range of reasonably possible outcomes, including outcomes that, while less likely, are within the realm of reasonable possibility.

Specifically, at this stage of the investigation, there remains a non-trivial possibility that the matter could be resolved for less than USD 38 million. This could occur in several scenarios:

• Downward revision of affected commerce. If Hargrove's analysis produces a materially lower affected-commerce figure — for example, if certain product categories or contract types are excluded — the base fine would decrease proportionally, and the low end of the penalty range could fall below USD 38 million.

• Maximum cooperation credit. If TMC achieves the highest tier of cooperation credit recognized by the DOJ — for example, by providing information that substantially advances the DOJ's prosecution of other targets — the reduction from the base fine could exceed 60%, pushing the penalty below USD 38 million.

• Non-prosecution agreement or declination. If the DOJ determines that the evidence against TMC, as opposed to Holt individually, is insufficient to sustain a corporate prosecution — particularly if TMC can demonstrate the absence of institutional knowledge — the matter could be resolved through a declination or a non-prosecution agreement with a reduced or nominal monetary payment.

In light of these residual uncertainties, the range of reasonably estimable outcomes as of October 2022 includes amounts below the USD 38 million low end of the "realistic penalty range." Accordingly, a reserve of USD 30 million is within the range of reasonable estimates and is defensible under ASC 450 at this stage of the investigation.

We emphasize, however, that this conclusion is contingent on the early stage of the investigation and the significant remaining uncertainties. As those uncertainties resolve — in particular, as the internal investigation is completed and the affected-commerce analysis matures — the minimum of the range may shift upward, requiring an increase in the reserve.

C. Application of IAS 37 — Best Estimate

Under IAS 37, the provision should be measured at the "best estimate" of the expenditure required to settle the present obligation at the balance sheet date. For a single obligation, the best estimate is the most likely outcome. Where there is a continuous range of possible outcomes, the best estimate is determined by the expected value (probability-weighted average).

Applying a simplified probability-weighted analysis to the current fact pattern:

The probability-weighted expected value of approximately USD 44 million suggests that the IAS 37 best estimate may be higher than the current reserve of USD 30 million. However, we note that the probability weights assigned above are themselves subject to significant uncertainty at this early stage, and reasonable alternative weighting assumptions could produce an expected value in the range of USD 30–50 million.

A reserve of USD 30 million, while at the lower end of the range of supportable estimates under IAS 37, is defensible given the early stage of the investigation, the significant remaining uncertainties, and the conservative probability weighting that can be applied to the below-range and declination scenarios at this time. We do note, however, that IAS 37 may support a higher provision than ASC 450 as additional facts become known, and this divergence should be monitored in coordination with Calvert & Associates.

D. Comparison with Initial Reserve

The initial reserve of USD 30 million was established in March 2022, contemporaneously with the filing of TMC's fiscal year 2021 annual report. At that time, TMC had received the grand jury subpoena but had not yet received the target letter, the internal investigation was in its earliest stages, and the affected-commerce analysis had not yet commenced.

Since the establishment of the initial reserve, several significant developments have occurred:

• TMC received the DOJ target letter on May 20, 2022, which increased the assessed probability of an adverse monetary outcome;

• The internal investigation has progressed, revealing 37 documented communications between Holt and competitor counterparts and corroborative pricing patterns;

• Holt has asserted Fifth Amendment privilege and declined to cooperate with TMC's internal investigation;

• Document production to the DOJ is approximately 72% complete (350,000 of an expected 487,000 documents).

These developments have collectively increased the assessed probability of loss from approximately 65–70% (at the time the initial reserve was established) to approximately 80–85% (as of the date of this memorandum). The target letter, in particular, was a significant development that would ordinarily warrant a reassessment of the reserve. However, while the probability of loss has increased, the estimated range of loss has not materially changed. The affected-commerce estimate remains preliminary, the cooperation credit calculation remains speculative, and no charges have been filed. Accordingly, the developments since March 2022 do not, at this time, require a change to the reserve amount.

Recommendation. The USD 30 million reserve remains appropriate as of the date of this memorandum. However, the reserve should be formally reassessed in Q1 2023 after:

(i) the internal investigation is completed and the findings are presented to the Board of Directors (scheduled for January 20, 2023);

(ii) Hargrove Forensic Advisory delivers its preliminary affected-commerce analysis; and

(iii) TMC's cooperation and defense strategy is further advanced, including any additional communications with the DOJ prosecution team regarding the scope of the investigation and potential resolution frameworks.

At the time of the Q1 2023 reassessment, an increase in the reserve to the range of USD 40–50 million may be warranted, depending on the findings of the internal investigation and the economic analysis. We will provide an updated reserve recommendation at that time.

VII. D&O Insurance Considerations

TMC tendered notice of the DOJ investigation to Northland Mutual Insurance Co. ("Northland") on March 4, 2022, under Directors & Officers Liability Insurance Policy No. NMI-DO-2021-5547. The policy has a policy period of July 1, 2021, through July 1, 2022, and is renewed annually. The primary-layer policy provides an aggregate limit of liability of USD 50 million, subject to a per-claim retention (self-insured deductible) of USD 2.5 million.

Northland acknowledged TMC's notice of the investigation and confirmed coverage for defense costs incurred by individual directors and officers of TMC who may become the subject of the investigation. However, Northland issued a reservation of rights letter on approximately April 15, 2022, in which it reserved its rights regarding:

• Entity coverage: Northland questioned whether the policy's entity-coverage provisions extend to defense costs incurred by TMC as a corporate entity (as opposed to individual insureds) in connection with a criminal antitrust investigation;

• Regulatory/criminal exclusion: Northland reserved the right to deny coverage under the policy's exclusion for loss arising from the commission of a criminal act, pending the outcome of the investigation; and

• Penalties and fines exclusion: Northland noted that the policy excludes coverage for criminal fines and penalties, and reserved the right to deny coverage for any such amounts.

Calderwood & Harkness responded to Northland's reservation of rights on April 28, 2022, in a detailed letter contesting the applicability of the criminal-act exclusion at the pre-adjudication stage. Our position is that the criminal-act exclusion, which by its terms applies to losses "arising from" the commission of a deliberate criminal act, cannot be invoked until there has been a final, non-appealable adjudication of criminal conduct. At the pre-adjudication stage, TMC is entitled to the presumption of innocence, and the insurer cannot rely on unproven allegations to deny coverage for defense costs. This position is well supported by case law in the majority of jurisdictions that have addressed the issue.

In addition to the primary-layer coverage with Northland, TMC has notified its excess-layer carriers:

• Greystone Specialty Insurance Ltd. provides Layer 2 excess coverage of USD 25 million in excess of the USD 50 million Northland primary limit (i.e., coverage from USD 50 million to USD 75 million); and

• Sentinel Re Ltd. provides Layer 3 excess coverage of USD 25 million in excess of the USD 75 million aggregate of Layers 1 and 2 (i.e., coverage from USD 75 million to USD 100 million).

Both excess-layer carriers have acknowledged receipt of TMC's notice and have reserved their rights pending the outcome of the coverage determination at the primary level.

For purposes of the litigation reserve analysis, D&O insurance proceeds should not be factored into the reserve calculation under ASC 450 or IAS 37. This is the case for several reasons:

• Coverage remains actively disputed, and there is no assurance that Northland or the excess-layer carriers will ultimately agree to provide coverage for any portion of TMC's losses;

• The D&O policies cover defense costs rather than penalties or fines, and criminal antitrust fines and penalties are typically excluded from D&O coverage. Accordingly, even if the coverage dispute is resolved in TMC's favor, the insurance recovery would likely be limited to defense costs and would not offset the reserve for the potential penalty;

• Under ASC 450 and IAS 37, a contingent asset (such as an insurance recovery) is recognized separately from the related loss contingency and only when the recovery is "virtually certain" (IAS 37) or when the recovery is "probable" (ASC 450). Given the pending coverage dispute, neither standard is satisfied.

Any insurance recovery that is ultimately obtained would reduce TMC's out-of-pocket exposure and would be recognized as a separate asset (or offset to expense) when the conditions for recognition are met. The D&O coverage status will continue to be monitored and will be addressed in future reserve updates.

VIII. Public Disclosure Considerations

TMC's public disclosure obligations in connection with the DOJ investigation arise under both U.S. securities law (as a foreign private issuer listed on the NYSE and filing annual reports on SEC Form 40-F) and Canadian securities law (as a reporting issuer subject to continuous disclosure obligations under National Instrument 51-102).

Initial Disclosure. TMC disclosed the existence of the DOJ investigation in its fiscal year 2021 annual report, which was filed on SEDAR+ (Canada) and with the SEC on Form 40-F on March 28, 2022. The disclosure was included in the "Contingencies" note to TMC's audited consolidated financial statements and in the "Legal Proceedings" section of the Management's Discussion and Analysis. The disclosure language described the matter as a pending government investigation into pricing practices in the North American specialty-minerals sector, noted that TMC had received a grand jury subpoena and was cooperating with the investigation, established a litigation reserve of USD 30 million, and indicated that the ultimate outcome of the investigation cannot be predicted with certainty and that the actual loss may differ materially from the amount reserved. The disclosure did not reference the target letter (which was received subs

CALDERWOOD & HARKNESS LLP 555 California Street, 40th Floor San Francisco, California 94104
PRIVILEGED AND CONFIDENTIAL ATTORNEY-CLIENT COMMUNICATION / ATTORNEY WORK PRODUCT
PRIVILEGED AND CONFIDENTIAL — ATTORNEY-CLIENT PRIVILEGE / ATTORNEY WORK PRODUCT DOCTRINE — This memorandum has been prepared by Calderwood & Harkness LLP at the request of the Audit Committee of the Board of Directors of Torchlight Mining Corp. for the purpose of providing legal advice regarding litigation reserve analysis. It is protected from disclosure by the attorney-client privilege and/or the work-product doctrine. Do not distribute without prior approval of Calderwood & Harkness LLP.
MEMORANDUM
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I. Executive Summary
The purpose of this memorandum is to advise the Audit Committee of the Board of Directors of Torchlight Mining Corp. ("TMC" or the "Company") on the appropriate litigation reserve to be established and maintained by TMC in connection with the ongoing investigation by the Antitrust Division of the United States Department of Justice ("DOJ") into suspected price-fixing, market allocation, and bid-rigging in the North American specialty-minerals sector. The investigation is being conducted through Grand Jury No. GJ-22-0194 in the United States District Court for the Northern District of California, San Francisco Division.
Based on our comprehensive review of the current stage of the investigation as of October 15, 2022, our analysis of TMC's potential financial exposure under the applicable penalty framework, our assessment of the probability and estimated range of loss under both ASC 450 (U.S. GAAP) and IAS 37 (IFRS), and our consideration of mitigating factors including TMC's cooperation posture and the preliminary status of the affected-commerce analysis, we conclude that the initial litigation reserve of USD 30 million established in March 2022 — which was disclosed in TMC's fiscal year 2021 annual report filed on March 28, 2022 — remains appropriate and adequate at this time.
This conclusion, however, is necessarily subject to revision as the investigation progresses and as additional facts are developed through our ongoing internal investigation, the DOJ's continued document review and witness activity, and the economic analysis being prepared by Hargrove Forensic Advisory LLC. Calderwood & Harkness will provide updated reserve analyses to the Audit Committee on a quarterly basis, or more frequently as circumstances warrant, including upon the occurrence of material developments such as the filing of charges, the commencement of plea or resolution discussions, or the receipt of additional substantive communications from the DOJ.
This analysis has been conducted in close coordination with TMC's independent auditor, Calvert & Associates LLP (engagement partner Daniel Moreau), and TMC's Chief Financial Officer, Richard Fong, to ensure that the reserve methodology and conclusions are consistent with TMC's financial-reporting requirements under both U.S. GAAP and IFRS. Calvert & Associates has been provided with a summary of our analysis framework and has confirmed that the approach set forth herein is consistent with applicable accounting standards.
II. Background — The DOJ Investigation
A. Overview of the Investigation
On February 10, 2022, the Antitrust Division of the United States Department of Justice formally opened a grand jury investigation, designated Grand Jury No. GJ-22-0194, in the United States District Court for the Northern District of California, San Francisco Division. The investigation concerns suspected violations of Section 1 of the Sherman Antitrust Act, 15 U.S.C. § 1, specifically price-fixing, market allocation, and bid-rigging in the North American specialty-minerals sector. The products at issue include high-purity feldspar, industrial talc, and rare-earth concentrates — commodity and specialty mineral products that are sold to customers in the ceramics, coatings, plastics, electronics, and defense-supply industries, among others.
The investigation is being conducted by the DOJ Antitrust Division's San Francisco Field Office, located at 450 Golden Gate Avenue, Room 10-0101, San Francisco, California 94102, under the supervision of the Division's Criminal Enforcement Section at the DOJ's headquarters in Washington, D.C. The lead prosecutors assigned to the matter are Trial Attorney Denise Kowalski and Senior Trial Attorney Marcus Reeves, both of the San Francisco Field Office. The investigation is being supervised by Deputy Assistant Attorney General Julia Stafford-Hayes, who oversees criminal enforcement matters within the Antitrust Division. The involvement of the DAAG's office in direct supervision of the matter suggests that the DOJ considers the investigation to be of significant scope and priority within its criminal enforcement docket.
Based on our interactions with the prosecution team and our review of the grand jury subpoena materials, the investigation appears to encompass the full scope of the North American specialty-minerals market for the identified products, with a particular focus on pricing conduct, customer allocation arrangements, and bid coordination in connection with government and large-volume commercial procurement solicitations during the period from approximately January 2017 through at least August 2021.
B. TMC's Involvement
TMC's involvement in the investigation commenced with the service of Grand Jury Subpoena No. GJ-22-0194-SD-003 on TMC's registered agent for service of process in the Northern District of California on February 14, 2022, four days after the investigation was formally opened. The subpoena called for the production of a broad range of documents, including pricing correspondence, customer lists, bid submissions, meeting calendars, electronic communications (including text messages, instant messages, and communications through encrypted messaging platforms), travel records, and corporate policy documents relating to the Company's U.S. Specialty Minerals Division. The subpoena also identified a number of custodians by name, including Gavin Holt, Sandra Chu, Thomas Eriksen, and several other current and former employees of the U.S. Specialty Minerals Division.
Upon receipt of the subpoena, TMC's General Counsel, Priya Anand, promptly contacted Calderwood & Harkness LLP for outside antitrust defense representation. Calderwood & Harkness was formally engaged on February 18, 2022, pursuant to an engagement letter executed by Ms. Anand on behalf of TMC.
On May 20, 2022, TMC received a target letter from the DOJ Antitrust Division, signed by Trial Attorney Denise Kowalski and Senior Trial Attorney Marcus Reeves, advising TMC that it is a "target" of the grand jury investigation. The receipt of a target letter is a significant procedural development in federal criminal investigations. While a target letter does not itself constitute a charge, it indicates that the DOJ has identified TMC as a person or entity as to which the prosecutor possesses substantial evidence linking it to the commission of a crime and who, in the judgment of the prosecutor, is a putative defendant. The issuance of the target letter materially elevated the severity of the investigation as it pertains to TMC and was a key factor in our assessment of the probability of an adverse financial outcome, as discussed in Section V below.
TMC's U.S. Specialty Minerals Division — the division at the center of the investigation — is headquartered in Reno, Nevada, and operates mining and processing facilities in Nevada, California, and Montana. The Division generated approximately USD 687 million in revenue in fiscal year 2021, accounting for approximately 20% of TMC's consolidated revenue of approximately CAD 4.27 billion (approximately USD 3.38 billion at prevailing exchange rates). The Division's products are sold to over 400 customers across North America, with significant concentrations in the ceramics, electronics, and defense-supply sectors. The financial significance of the Division to TMC's overall operations underscores the materiality of the investigation and the importance of maintaining an appropriate litigation reserve.
C. Co-Subjects and Cooperating Witnesses
The DOJ investigation encompasses multiple companies in the North American specialty-minerals sector. Based on our discussions with the prosecution team, publicly available information, and intelligence gathered through informal channels in the antitrust defense bar, we have identified the following companies as co-subjects, targets, or cooperating parties in the investigation:
Ridgecrest Minerals Inc. Ridgecrest is a Delaware corporation headquartered in Denver, Colorado. It reported fiscal year 2021 revenue of approximately USD 1.92 billion and is a portfolio company of Marlowe Asset Management Peak Capital Partners LP, a mid-market private equity firm based in New York. Ridgecrest received a DOJ target letter on or about January 12, 2022 — approximately one month before TMC received its subpoena — which suggests that Ridgecrest may have been identified as a target at an earlier stage of the investigation. Ridgecrest is represented in the investigation by Davenport, Kline & Archer LLP. We have had limited but cordial communication with Ridgecrest's counsel regarding logistical matters (such as joint-defense privilege issues and document-production timelines), but have not entered into a formal joint-defense agreement with Ridgecrest at this time, and the question of whether such an agreement would be strategically appropriate remains under evaluation.
Pinnacle Earth Resources Ltd. Pinnacle is a corporation organized under the laws of Ontario, Canada, and is headquartered in Sudbury, Ontario. It reported fiscal year 2021 revenue of approximately CAD 1.45 billion (approximately USD 1.15 billion at prevailing exchange rates). Pinnacle is a co-subject in the investigation and is represented by Ashford Whitmore LLP. Pinnacle's status as a target versus a subject is not known to us with certainty, though certain indications suggest it may currently hold subject status. The distinction is relevant because it may affect the DOJ's allocation of culpability among the alleged co-conspirators and, consequently, the penalties each entity faces.
Cascade Chemical Supply Co. Cascade is a Washington corporation headquartered in Spokane, Washington. Cascade is a smaller participant in the specialty-minerals sector and entered into a cooperation agreement with the DOJ Antitrust Division on or about September 15, 2021 — approximately five months before the grand jury investigation was formally opened. It was Cascade's cooperation with the DOJ that triggered the broader investigation into the specialty-minerals sector. Cascade is represented by Whitfield, Strauss & Tully LLP. We understand that Cascade has been providing the DOJ with documents, testimony, and proffer sessions as part of its cooperation obligations. The nature and extent of the evidence that Cascade has provided to the DOJ is not fully known to us, but we assess with a high degree of confidence that Cascade's cooperation has been a primary driver of the DOJ's case development.
D. Alleged Conduct
Based on our review of the grand jury subpoena, the target letter, informal communications with the prosecution team, and our internal investigation to date, the DOJ alleges that from approximately January 2017 through at least August 2021 — a period of approximately four years and eight months — senior commercial personnel at TMC, Ridgecrest, and Pinnacle engaged in an unlawful agreement to fix prices, allocate customers, and rig bids for high-purity feldspar, industrial talc, and rare-earth concentrates sold to customers in North America.
The individuals alleged to have been the principal participants in the conspiracy are:
• Gavin Holt, former Vice President of U.S. Specialty Minerals Sales at TMC (employed at TMC from March 2014 through September 30, 2021);
• 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 DOJ alleges that the coordination among these individuals occurred through multiple channels, including:
• In-person meetings at the quarterly conferences of the North American Specialty Minerals Council ("NASMC"), which took place at various locations including Arlington, Virginia; Scottsdale, Arizona; and Orlando, Florida. These conferences provided regular opportunities for face-to-face contact among the alleged co-conspirators under the guise of legitimate industry engagement;
• Encrypted messaging via the VaultChat application, a commercially available end-to-end encrypted messaging platform that is designed to leave no persistent message history on the user's device. The use of an encrypted, auto-deleting messaging platform to conduct pricing discussions is a significant factor in the DOJ's assessment of culpability, as it suggests consciousness of the impropriety of the communications; and
• Occasional telephone calls, both to domestic and international numbers, the records of which have been obtained by the DOJ through grand jury subpoenas to telecommunications providers.
The alleged conduct includes specific agreements to coordinate pricing for high-purity feldspar sold to ceramics manufacturers, to allocate certain rare-earth-concentrate customers between TMC and Ridgecrest (with Pinnacle receiving allocations in certain industrial-talc product segments), and to rig bids submitted in response to procurement solicitations issued by U.S. government agencies and defense-sector prime contractors.
E. Key Individual — Gavin Holt
Gavin Holt is the former Vice President of U.S. Specialty Minerals Sales at TMC and is the individual most directly implicated in the alleged pricing communications. As noted above, Holt was employed by TMC from March 2014 through September 30, 2021. His resignation from TMC became effective on September 30, 2021, approximately four and a half months before the DOJ formally opened the grand jury investigation and approximately two weeks after Cascade Chemical Supply Co. entered into its cooperation agreement with the DOJ. The timing of Holt's resignation has been noted by the prosecution team, though we are not aware of any evidence that Holt had actual knowledge of Cascade's cooperation at the time of his resignation.
Following the commencement of the investigation and the receipt of the target letter, TMC's counsel reached out to Holt through professional channels to request his voluntary cooperation with the Company's internal investigation. Holt retained personal counsel, Patrick Dunleavy of Briarcliff Law Group PLLC in San Francisco, on or about June 10, 2022. Through Mr. Dunleavy, Holt indicated that he would not voluntarily participate in TMC's internal investigation. Holt declined TMC's request for an interview through his counsel on August 5, 2022.
On June 14, 2022, Holt appeared before the grand jury pursuant to subpoena and asserted his Fifth Amendment privilege against self-incrimination, declining to testify. The invocation of Fifth Amendment privilege is, of course, Holt's constitutional right, and no adverse inference may be drawn from it in a criminal proceeding. However, Holt's refusal to cooperate with both the grand jury and TMC's internal investigation limits our ability to assess the full scope of his conduct and, consequently, TMC's potential exposure.
Holt is the individual most directly implicated in the alleged pricing communications. Our internal investigation has identified him as the primary TMC participant in contacts with competitor personnel, and the 37 documented communications referenced in Section V.A below all involve Holt. No other current or former TMC employee has been identified to date as a direct participant in inter-competitor pricing discussions, though several employees (including Sandra Chu, Director of U.S. Specialty Minerals Pricing) received instructions from Holt that may have been informed by his contacts with competitors.
F. Current Status of Investigation (as of October 2022)
The investigation remains in its active, pre-charging phase. The following summarizes the key procedural milestones and the current status of both the DOJ investigation and TMC's internal investigation as of the date of this memorandum:
Document Preservation and Collection. TMC issued a company-wide litigation hold on March 1, 2022, covering all documents and electronically stored information potentially relevant to the investigation. Data collection commenced on March 15, 2022, through Redstone Digital Forensics Inc. ("Redstone"), an electronic-discovery and forensic-data vendor retained by Calderwood & Harkness on TMC's behalf. Redstone has collected data from 38 custodians, including current and former employees, as well as from shared network drives, email servers, and enterprise resource planning systems.
Document Production. The first rolling production to the DOJ, consisting of approximately 42,000 documents, was made on April 4, 2022. Additional rolling productions have been made on a regular basis since August 2022 and are projected to continue through completion by approximately December 2022. As of the date of this memorandum, the cumulative document production to the DOJ comprises approximately 350,000 documents. Based on the remaining custodian collections and processing queues, the final cumulative production is expected to total approximately 487,000 documents. All productions have been accompanied by privilege logs identifying documents withheld on the basis of attorney-client privilege and/or attorney work product.
Internal Investigation. Calderwood & Harkness's internal investigation is ongoing. We have planned a total of 23 employee interviews, a number of which have been completed. Key interviews conducted to date include:
• Sandra Chu, Director, U.S. Specialty Minerals Pricing (interviewed July 18, 2022);
• Thomas Eriksen, Regional Sales Manager, U.S. Specialty Minerals Division (interviewed July 22, 2022);
• Priya Anand, General Counsel, TMC (interviewed August 12, 2022);
• Richard Fong, Chief Financial Officer, TMC (interviewed August 19, 2022).
As noted in Section II.E above, Gavin Holt declined TMC's request for an interview on August 5, 2022, through his personal counsel. The remaining planned interviews are scheduled to be completed by late November or early December 2022, with a full presentation of internal investigation findings to the Board of Directors scheduled for January 20, 2023.
Expert Economic Analysis. TMC retained Hargrove Forensic Advisory LLC on July 1, 2022, under the direction of Dr. Vanessa Tremblay, a forensic economist specializing in antitrust damages and affected-commerce quantification. Hargrove has been engaged to analyze pricing patterns in the specialty-minerals market during the alleged conspiracy period, to assess the volume of affected commerce attributable to TMC, and to evaluate the potential overcharge (if any) resulting from the alleged conduct. Hargrove's preliminary analysis is expected in Q1 2023, and its work product will be critical to refining the reserve estimate at that time.
Cooperation Posture. TMC communicated its willingness to cooperate with the DOJ investigation through a formal letter from Calderwood & Harkness to Trial Attorney Denise Kowalski dated June 8, 2022. The letter outlined TMC's commitment to full and timely document production, to making current employees available for interviews as requested by the DOJ, and to providing ongoing factual presentations to the prosecution team as TMC's internal investigation progresses. The DOJ has acknowledged TMC's cooperation posture but has not yet made any formal assessment of cooperation credit. The degree of cooperation credit that TMC ultimately receives will be a significant factor in determining the final penalty amount.
Charges. No charges have been filed against TMC or any current or former TMC employee as of the date of this memorandum. The timing of any potential charges is uncertain but, based on the pace of the investigation and the remaining document production, we do not anticipate the filing of charges or the commencement of formal resolution discussions before mid-2023 at the earliest.
III. Applicable Accounting Standards
The litigation reserve analysis for the DOJ investigation must be conducted under two applicable financial-reporting frameworks, as TMC reports its financial results under both U.S. Generally Accepted Accounting Principles ("U.S. GAAP") and International Financial Reporting Standards ("IFRS"). TMC is a Canadian corporation listed on the Toronto Stock Exchange and cross-listed on the New York Stock Exchange as a foreign private issuer, filing annual reports on SEC Form 40-F. Accordingly, TMC's financial statements must satisfy the requirements of both frameworks with respect to the recognition, measurement, and disclosure of contingent liabilities arising from the DOJ investigation.
A. ASC 450 (Contingencies) — U.S. GAAP
Under Accounting Standards Codification Topic 450 ("ASC 450"), formerly Statement of Financial Accounting Standards No. 5 ("SFAS No. 5"), a loss contingency must be accrued when two conditions are met:
(i) Information available prior to the issuance of the financial statements indicates that it is probable that a liability has been incurred at the date of the financial statements; and
(ii) The amount of the loss can be reasonably estimated.
The term "probable" as used in ASC 450-20-25 is generally interpreted by the accounting profession and the SEC staff as indicating a likelihood threshold of approximately 75% or greater — that is, the event is likely to occur. This is a higher threshold than the "more likely than not" standard applied under IFRS (discussed below), and the distinction between these thresholds has practical implications for TMC's dual-GAAP reporting.
If a loss is determined to be only "reasonably possible" — defined as a likelihood that is more than remote but less than probable — then disclosure of the contingency is required in the notes to the financial statements, but accrual is not. If the loss is determined to be "remote" — meaning the chance of the loss occurring is slight — neither accrual nor disclosure is required.
Where the conditions for accrual are met and a range of loss is estimable, but no single amount within the range is a better estimate than any other amount, ASC 450-20-30 provides that the minimum amount in the range should be accrued. This is a significant provision in the context of the present analysis, as it permits the accrual of a reserve at the low end of the estimated range when, as here, the ultimate outcome is subject to significant uncertainty and no single point estimate can be identified with confidence. Disclosure of the full range, including any amounts in excess of the accrued amount, is required in the notes to the financial statements.
B. IAS 37 (Provisions, Contingent Liabilities and Contingent Assets) — IFRS
Under International Accounting Standard 37 ("IAS 37"), an entity is required to recognize a provision — the IFRS equivalent of a loss accrual — when three conditions are met:
(i) There is a present obligation (legal or constructive) as a result of a past event;
(ii) It is probable that an outflow of resources embodying economic benefits will be required to settle the obligation; and
(iii) A reliable estimate of the amount of the obligation can be made.
Critically, the term "probable" as used in IAS 37 is defined as "more likely than not," which is generally interpreted as a likelihood threshold of greater than 50%. This is a materially lower threshold than the "probable" standard under ASC 450 (approximately 75% or greater). The consequence of this divergence is that a contingency may require provision recognition under IAS 37 before it requires accrual under ASC 450, and TMC's financial reporting team must manage this difference in the preparation of its dual-GAAP financial statements.
Where there is a continuous range of possible outcomes and each point in the range is as likely as any other, IAS 37 requires recognition at the "best estimate" of the expenditure required to settle the present obligation. For a single obligation, the best estimate is the most likely outcome. Where the provision involves a large population of items, the best estimate is determined by weighting all possible outcomes by their associated probabilities — that is, the expected value or probability-weighted average. Unlike ASC 450, which permits accrual at the minimum of the range when no better estimate exists, IAS 37 directs the entity to accrue at the best estimate, which may be at or near the midpoint of the range.
The difference in measurement methodology between ASC 450 and IAS 37 creates a situation in which the IAS 37 provision may need to be larger than the ASC 450 accrual for the same contingency. In the present case, however, the significant uncertainties at this early stage of the investigation and the broad range of possible outcomes provide sufficient basis for the current USD 30 million reserve under both frameworks, as discussed in Section VI below.
C. Coordination with Calvert & Associates LLP
TMC's independent auditor, Calvert & Associates LLP ("Calvert"), has been consulted throughout the reserve analysis process to ensure that the methodology and conclusions are consistent with applicable accounting standards and with Calvert's expectations as the external auditor. Daniel Moreau, the engagement partner at Calvert responsible for the TMC audit engagement, has reviewed the general framework of the reserve analysis (without receiving this privileged memorandum) and has confirmed that the approach is consistent with both ASC 450 and IAS 37 requirements.
Calvert has requested that Calderwood & Harkness provide periodic audit-response letters regarding the status and potential financial impact of the investigation, in accordance with AU-C Section 501 (Audit Evidence — Specific Considerations for Selected Items) and the American Bar Association's Statement of Policy Regarding Lawyers' Responses to Auditors' Requests for Information (the "ABA Treaty"). Calderwood & Harkness has provided an initial audit-response letter and will provide updated letters in connection with each subsequent reporting period. These letters are carefully drafted to provide the auditor with sufficient information to assess the adequacy of the reserve without inadvertently waiving privilege or disclosing attorney mental impressions or work product.
Calvert concurs that the reserve analysis framework set forth herein is consistent with both ASC 450 and IAS 37 requirements and has not raised any objections to the current reserve level of USD 30 million, while acknowledging (as we do) that the reserve is subject to reassessment as the investigation progresses.
IV. Analysis of Potential Financial Exposure
A. DOJ Penalty Framework — Sherman Act Criminal Fines
The statutory framework for criminal fines in antitrust cases is governed by Section 1 of the Sherman Antitrust Act, 15 U.S.C. § 1, and the Alternative Fines Act, 18 U.S.C. § 3571(d). Under Section 1 of the Sherman Act, a corporation convicted of a price-fixing, market-allocation, or bid-rigging offense faces a maximum fine of USD 100 million per count. However, under the Alternative Fines Act, 18 U.S.C. § 3571(d), the maximum fine may be increased to twice the gross gain derived from the offense by the defendant, or twice the gross loss caused to the victims of the offense, whichever is greater. In practice, the Alternative Fines Act substantially increases the maximum fine exposure in cases involving large volumes of affected commerce, and fines exceeding the USD 100 million statutory cap have been imposed in several high-profile antitrust cases in recent years.
The DOJ Antitrust Division's standard methodology for calculating recommended fines in criminal antitrust cases is based on the U.S. Sentencing Guidelines, specifically Section 2R1.1 (Bid-Rigging, Price-Fixing or Market-Allocation Agreements Among Competitors). Under the Sentencing Guidelines, the base fine is calculated as 20% of the volume of affected commerce attributable to the defendant during the period of the violation. This base fine is then adjusted upward or downward based on a series of culpability factors, including:
• The involvement or tolerance of the offense by high-level personnel or substantial authority personnel;
• The defendant's prior history of criminal or regulatory violations;
• Whether the defendant violated an order, injunction, or condition of probation;
• Whether the defendant obstructed justice;
• The effectiveness of the defendant's pre-existing compliance program;
• Whether the defendant self-reported the offense;
• The extent and timeliness of the defendant's cooperation with the investigation; and
• The defendant's acceptance of responsibility and implementation of remedial measures.
The resulting fine range is presented to the sentencing court as a recommendation, and the court retains discretion to impose a fine within or outside the Guidelines range based on the factors set forth in 18 U.S.C. § 3553(a). In practice, negotiated plea agreements or non-prosecution agreements ("NPAs") typically specify the agreed-upon fine amount, which the court generally accepts.
B. Affected Commerce Estimate
The volume of affected commerce is the critical variable in the penalty calculation. Based on information provided by the DOJ in the course of the investigation and our preliminary internal analysis, the DOJ estimates total affected commerce — defined as the aggregate U.S. sales of high-purity feldspar, industrial talc, and rare-earth concentrates by all alleged co-conspirators during the period from approximately January 2017 through August 2021 — at approximately USD 1.34 billion.
TMC's share of 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. Specialty Minerals Division's sales data for the relevant product categories during the relevant time period, as compiled by TMC's finance team and reviewed by Calderwood & Harkness.
It is important to note that these figures are preliminary and are subject to refinement. Several factors may cause the affected-commerce figure to be adjusted, either upward or downward, as the investigation progresses:
• Hargrove Forensic Advisory LLC is conducting an independent economic analysis of pricing patterns and affected-commerce volumes. Dr. Tremblay's preliminary analysis is expected in Q1 2023, and it may produce a figure that differs materially from the DOJ's current estimate.
• The DOJ's affected-commerce figure may include products or time periods that TMC may be able to argue should be excluded (for example, certain rare-earth-concentrate sales that were made pursuant to long-term fixed-price contracts that were not subject to the alleged price-fixing conduct).
• The precise start and end dates of the alleged conspiracy are subject to dispute; any narrowing of the conspiracy period would reduce the affected-commerce figure proportionally.
We will update the affected-commerce estimate as additional data becomes available and as Hargrove's analysis matures.
C. Potential Penalty Range
Based on the affected-commerce estimate set forth above and the DOJ's standard penalty methodology, we have constructed the following range of potential penalties for TMC:
Base Fine Calculation. TMC's share of affected commerce (USD 478 million) multiplied by the Sentencing Guidelines' 20% base-fine percentage yields a base fine of approximately USD 95.6 million.
Maximum Statutory Exposure. Under the Alternative Fines Act, the maximum fine could theoretically exceed USD 100 million if twice the gross gain or twice the gross loss exceeds that amount. A calculation of twice the gross gain or loss is speculative at this stage, as it would require a determination of the overcharge attributable to the alleged conspiracy, which is precisely the type of analysis that Hargrove Forensic Advisory is being retained to perform. For purposes of this analysis, we note the theoretical possibility that the maximum exposure could exceed USD 100 million but do not assign a specific dollar figure to this scenario.
Realistic Range Considering Cooperation and Mitigating Factors. In practice, the DOJ routinely grants cooperation credit and reductions for mitigating factors, resulting in fines that are substantially below the base fine. Based on our experience in comparable antitrust investigations and our assessment of TMC's cooperation posture, compliance program, and remedial actions, we estimate the following realistic penalty range:
The high-end scenario assumes that TMC receives only limited cooperation credit — for example, if the DOJ determines that TMC's cooperation was untimely or incomplete, or that TMC failed to take adequate remedial actions. This scenario would also contemplate the possibility that the DOJ assigns a higher culpability score to TMC based on the involvement of a vice president-level executive (Gavin Holt), who may be deemed "substantial authority personnel" within the meaning of the Sentencing Guidelines.
The mid-range scenario assumes moderate cooperation credit consistent with TMC's current posture of voluntary cooperation, timely document production, and willingness to make employees available for DOJ interviews, balanced against the fact that TMC did not self-report the offense and that Holt's conduct arguably reflects a failure of internal controls.
The low-end scenario assumes that TMC achieves maximum cooperation credit, potentially including credit for implementing a comprehensive antitrust compliance program (which TMC has not yet done but which we recommend), for terminating the responsible personnel (Holt resigned prior to the investigation, but TMC could take additional disciplinary actions), and for providing substantial assistance to the DOJ in its prosecution of other targets.
Individual Fines. Gavin Holt's potential individual fine exposure under the Sherman Act (up to USD 1 million per count, or higher under the Alternative Fines Act) is not included in the entity reserve and is carved out from this analysis. Holt's personal liability is a matter between Holt and his personal counsel and the DOJ, and TMC has no obligation or intention to indemnify Holt for criminal fines.
D. Civil Litigation Exposure
It is well established in the antitrust enforcement landscape that criminal price-fixing convictions or guilty pleas by corporate defendants routinely trigger follow-on civil antitrust class-action litigation. Under the Clayton Antitrust Act, 15 U.S.C. § 15, private plaintiffs who have been injured by an antitrust violation are entitled to recover treble damages (three times the actual damages suffered), plus reasonable attorneys' fees and costs. A criminal conviction or guilty plea constitutes prima facie evidence of the antitrust violation in a subsequent civil action under 15 U.S.C. § 16(a), effectively eliminating the need for the private plaintiff to independently prove the existence of the conspiracy.
If TMC is able to avoid a criminal conviction through a non-prosecution agreement, the NPA would not constitute a per se basis for civil liability. Unlike a guilty plea or a conviction, an NPA is not an admission of criminal conduct that triggers the prima facie evidence provision of Section 16(a). However, private plaintiffs could still pursue civil antitrust claims based on independently gathered evidence, and the existence of the DOJ investigation and any public disclosures regarding the investigation would provide a roadmap for private litigation.
Civil exposure is not included in the litigation reserve analysis at this time. No follow-on civil antitrust actions have been filed to date against TMC or any of the other alleged co-conspirators, and the filing of such actions is unlikely until the DOJ investigation reaches a public resolution (whether through charges, a guilty plea, an NPA, or a declination). If and when civil litigation is filed, a separate reserve analysis will be conducted and presented to the Audit Committee. We note, however, that civil antitrust damages in price-fixing cases can be substantial — in recent comparable cases, civil settlement amounts have ranged from 10% to 25% of affected commerce — and the Audit Committee should be prepared for the potential need for a significant additional reserve if civil claims materialize.
E. Professional Fees
While professional fees are generally expensed as incurred and are not included in the litigation reserve under ASC 450 or IAS 37 (unless they relate directly to the contingent loss itself), we note them here for context and for the Audit Committee's financial planning purposes.
The following are our current estimates of total professional fees through resolution of the matter:
These estimates are based on current assumptions regarding the scope and duration of the investigation and are subject to revision. In particular, if the matter proceeds to trial rather than a negotiated resolution, legal fees could increase substantially. Additionally, if civil litigation is filed, separate defense counsel and experts will likely be required, generating additional fees not reflected in the estimates above.
As noted, professional fees are not included in the USD 30 million litigation reserve. They are expensed as incurred in accordance with TMC's accounting policies and are reflected in TMC's general and administrative expense line item in the applicable reporting periods.
V. Assessment of Probability of Loss
A. Probability Analysis Under ASC 450 ("Probable")
The threshold question under ASC 450-20-25 is whether it is "probable" — generally interpreted as approximately 75% or greater — that TMC will incur a loss in connection with the DOJ investigation. We have assessed this question by considering the totality of the facts and circumstances known as of the date of this memorandum, including the following key factors:
Target Letter. TMC has received a target letter from the DOJ Antitrust Division, indicating that the DOJ has identified TMC as a putative defendant and possesses substantial evidence linking TMC to the commission of a criminal antitrust violation. While the receipt of a target letter does not guarantee that charges will be filed, it significantly increases the assessed probability that the DOJ will seek some form of resolution — whether through a criminal charge, a plea agreement, or a non-prosecution agreement — that will involve a monetary payment by TMC. In our experience, the issuance of a target letter to a corporate entity in a criminal antitrust investigation results in a monetary resolution in the substantial majority of cases.
Documentary Evidence from Internal Investigation. Our internal investigation, while not yet complete, has revealed at least 37 documented communications between Gavin Holt and his competitor counterparts — Carl Edgerton of Ridgecrest and Kevin Tsang of Pinnacle — conducted through VaultChat messages recovered from backup systems, in-person meeting records reconstructed from travel and expense reports, and NASMC conference registration and attendance records. These communications span the period from approximately March 2017 through July 2021 and include discussions of pricing for high-purity feldspar, customer assignments for industrial-talc accounts, and bid coordination for specific government and commercial procurement solicitations. The substance and frequency of these communications are consistent with the DOJ's allegations of a sustained price-fixing, market-allocation, and bid-rigging conspiracy.
Sandra Chu's Interview. Sandra Chu, Director of U.S. Specialty Minerals Pricing at TMC, was interviewed on July 18, 2022. Chu confirmed that she received pricing-adjustment instructions from Gavin Holt on at least 12 occasions during the relevant period that called for price increases to specific customers at specific times. Chu stated that she was not aware of the reasons for these pricing instructions and implemented them in the ordinary course of her responsibilities. Our subsequent analysis has revealed that on each of the 12 occasions identified by Chu, the competitor pricing for the same products to the same or similar customers moved in a substantially similar direction within a narrow time window, which is consistent with coordinated pricing behavior. While there is no direct evidence that Chu had knowledge of Holt's inter-competitor communications, the pattern of pricing instructions she received provides corroborative evidence of the alleged conspiracy's implementation within TMC.
Cascade's Cooperation. The existence of Cascade Chemical Supply Co.'s cooperation agreement with the DOJ, which was executed approximately five months before the grand jury investigation was formally opened, strongly suggests that the DOJ possesses corroborative evidence from Cascade's files and personnel that extends beyond what TMC's own documents reveal. Cascade, as a direct participant in the alleged conspiracy, would have had its own records of pricing discussions and customer-allocation agreements, as well as testimony from its personnel regarding the nature and extent of the coordinated conduct. While we have not been able to review Cascade's cooperation proffers, the DOJ's decision to open a full grand jury investigation and to issue target letters to multiple companies indicates a high level of confidence in the evidence obtained through Cascade's cooperation.
Holt's Fifth Amendment Invocation. While no adverse inference may be drawn from Holt's invocation of the Fifth Amendment in the grand jury proceeding, his refusal to cooperate with TMC's internal investigation deprives TMC of a potential source of exculpatory or mitigating evidence. If Holt possessed information that could support a defense — for example, evidence that his communications with competitors were innocent or that they did not result in actual price coordination — his unwillingness to share that information with TMC means that such evidence is unavailable to support TMC's position.
Assessment. Considering the totality of these factors — the target letter, the documentary evidence of inter-competitor pricing communications, the corroborative pricing patterns identified in connection with Sandra Chu's testimony, the existence of a cooperating witness (Cascade), and the absence of any identified affirmative defense — we conclude that it is "probable" (as that term is used in ASC 450-20-25) that TMC will incur a loss in connection with the DOJ investigation, whether through a criminal fine, a monetary payment under a non-prosecution agreement, or other form of resolution. We estimate the probability of an adverse monetary outcome at approximately 80–85% as of the date of this memorandum.
B. Probability Analysis Under IAS 37 ("More Likely Than Not")
Under IAS 37, the applicable probability threshold is "more likely than not," which is generally interpreted as a likelihood of greater than 50%. Applying the same facts and circumstances discussed in Section V.A above, the conclusion under IAS 37 is even more clear: it is significantly more likely than not that TMC will incur an outflow of economic resources in connection with the DOJ investigation. Our assessed probability of approximately 80–85% comfortably exceeds the 50% threshold.
Accordingly, both accounting standards are satisfied, and TMC is required to recognize a provision (under IAS 37) and an accrual (under ASC 450) for the estimated loss arising from the DOJ investigation.
VI. Reasonableness of the USD 30 Million Reserve
A. Establishing the Range
As set forth in Section IV.C above, our estimated range of potential monetary exposure for TMC in connection with the DOJ investigation is approximately as follows:
• Low end: approximately USD 38 million (assuming maximum cooperation credit and significant mitigating factors, with a 50–60% reduction from the base fine);
• Mid-range: approximately USD 48–57 million (assuming moderate cooperation credit, with a 40–50% reduction from the base fine);
• High end: approximately USD 72 million (assuming limited cooperation credit, with approximately a 25% reduction from the base fine).
This range is based on our current affected-commerce estimate of USD 478 million, the 20% base-fine methodology, and our assessment of the cooperation credit and mitigating factors that may be available to TMC. The range does not include the maximum statutory exposure under the Alternative Fines Act, which we view as unlikely given the DOJ's standard approach to penalty calculations in negotiated resolutions.
However, several factors introduce significant uncertainty into this analysis at this early stage of the investigation (October 2022, approximately eight months after the commencement of the investigation and only five months after receipt of the target letter):
• The internal investigation is not complete. Calderwood & Harkness has completed interviews of several key witnesses but has additional interviews planned, and the full picture of Holt's conduct and its implementation within TMC is not yet known. Additional mitigating or aggravating facts may emerge.
• The affected-commerce figure is preliminary. Hargrove Forensic Advisory's independent economic analysis is not yet complete. Dr. Tremblay's work may produce an affected-commerce figure that differs materially — potentially in either direction — from the DOJ's preliminary estimate. In particular, TMC may be able to argue that certain product categories or customer relationships should be excluded from the affected-commerce calculation, which could reduce the base fine.
• The degree of cooperation credit is unknown. TMC has communicated its willingness to cooperate, and the cooperation process is underway, but the DOJ has not yet formally assessed TMC's cooperation. The degree of credit that TMC ultimately receives will depend on the completeness and timeliness of TMC's cooperation, TMC's willingness to enter into a resolution agreement, and the DOJ's assessment of the value of TMC's cooperation relative to the cooperation provided by other targets and subjects.
• Possibility of a favorable resolution. While increasingly unlikely given the receipt of the target letter and the strength of the evidence identified to date, it remains possible that the investigation could be resolved without any monetary payment by TMC. This could occur if TMC can successfully demonstrate to the DOJ that Gavin Holt acted outside the scope of his authority and that TMC lacked institutional knowledge of the alleged conduct — a defense that, while difficult to sustain, is not without precedent in criminal antitrust enforcement. The probability of this outcome is low (we estimate it at approximately 10–15%), but it is not so remote as to be disregarded in the reserve analysis.
• No charges have been filed. The investigation has not yet resulted in the filing of any charges against TMC or any TMC employee. While the target letter strongly suggests that charges or a negotiated resolution are likely, there remains a possibility — however small — that the investigation may not result in prosecution of TMC.
B. Application of ASC 450 — Minimum of Range
Under ASC 450-20-30, when a range of loss is estimable and no single amount within the range is a better estimate than any other amount, the minimum amount in the range should be accrued. The entity is then required to disclose the full range, including amounts in excess of the accrued amount, in the notes to the financial statements.
Applying this standard to the present analysis, the low end of the realistic penalty range is approximately USD 38 million (assuming maximum cooperation credit and significant mitigating factors). A reserve of USD 30 million is facially below the low end of that range. However, the ASC 450 range is not limited to the "realistic penalty range" — it must encompass the full range of reasonably possible outcomes, including outcomes that, while less likely, are within the realm of reasonable possibility.
Specifically, at this stage of the investigation, there remains a non-trivial possibility that the matter could be resolved for less than USD 38 million. This could occur in several scenarios:
• Downward revision of affected commerce. If Hargrove's analysis produces a materially lower affected-commerce figure — for example, if certain product categories or contract types are excluded — the base fine would decrease proportionally, and the low end of the penalty range could fall below USD 38 million.
• Maximum cooperation credit. If TMC achieves the highest tier of cooperation credit recognized by the DOJ — for example, by providing information that substantially advances the DOJ's prosecution of other targets — the reduction from the base fine could exceed 60%, pushing the penalty below USD 38 million.
• Non-prosecution agreement or declination. If the DOJ determines that the evidence against TMC, as opposed to Holt individually, is insufficient to sustain a corporate prosecution — particularly if TMC can demonstrate the absence of institutional knowledge — the matter could be resolved through a declination or a non-prosecution agreement with a reduced or nominal monetary payment.
In light of these residual uncertainties, the range of reasonably estimable outcomes as of October 2022 includes amounts below the USD 38 million low end of the "realistic penalty range." Accordingly, a reserve of USD 30 million is within the range of reasonable estimates and is defensible under ASC 450 at this stage of the investigation.
We emphasize, however, that this conclusion is contingent on the early stage of the investigation and the significant remaining uncertainties. As those uncertainties resolve — in particular, as the internal investigation is completed and the affected-commerce analysis matures — the minimum of the range may shift upward, requiring an increase in the reserve.
C. Application of IAS 37 — Best Estimate
Under IAS 37, the provision should be measured at the "best estimate" of the expenditure required to settle the present obligation at the balance sheet date. For a single obligation, the best estimate is the most likely outcome. Where there is a continuous range of possible outcomes, the best estimate is determined by the expected value (probability-weighted average).
Applying a simplified probability-weighted analysis to the current fact pattern:
The probability-weighted expected value of approximately USD 44 million suggests that the IAS 37 best estimate may be higher than the current reserve of USD 30 million. However, we note that the probability weights assigned above are themselves subject to significant uncertainty at this early stage, and reasonable alternative weighting assumptions could produce an expected value in the range of USD 30–50 million.
A reserve of USD 30 million, while at the lower end of the range of supportable estimates under IAS 37, is defensible given the early stage of the investigation, the significant remaining uncertainties, and the conservative probability weighting that can be applied to the below-range and declination scenarios at this time. We do note, however, that IAS 37 may support a higher provision than ASC 450 as additional facts become known, and this divergence should be monitored in coordination with Calvert & Associates.
D. Comparison with Initial Reserve
The initial reserve of USD 30 million was established in March 2022, contemporaneously with the filing of TMC's fiscal year 2021 annual report. At that time, TMC had received the grand jury subpoena but had not yet received the target letter, the internal investigation was in its earliest stages, and the affected-commerce analysis had not yet commenced.
Since the establishment of the initial reserve, several significant developments have occurred:
• TMC received the DOJ target letter on May 20, 2022, which increased the assessed probability of an adverse monetary outcome;
• The internal investigation has progressed, revealing 37 documented communications between Holt and competitor counterparts and corroborative pricing patterns;
• Holt has asserted Fifth Amendment privilege and declined to cooperate with TMC's internal investigation;
• Document production to the DOJ is approximately 72% complete (350,000 of an expected 487,000 documents).
These developments have collectively increased the assessed probability of loss from approximately 65–70% (at the time the initial reserve was established) to approximately 80–85% (as of the date of this memorandum). The target letter, in particular, was a significant development that would ordinarily warrant a reassessment of the reserve. However, while the probability of loss has increased, the estimated range of loss has not materially changed. The affected-commerce estimate remains preliminary, the cooperation credit calculation remains speculative, and no charges have been filed. Accordingly, the developments since March 2022 do not, at this time, require a change to the reserve amount.
Recommendation. The USD 30 million reserve remains appropriate as of the date of this memorandum. However, the reserve should be formally reassessed in Q1 2023 after:
(i) the internal investigation is completed and the findings are presented to the Board of Directors (scheduled for January 20, 2023);
(ii) Hargrove Forensic Advisory delivers its preliminary affected-commerce analysis; and
(iii) TMC's cooperation and defense strategy is further advanced, including any additional communications with the DOJ prosecution team regarding the scope of the investigation and potential resolution frameworks.
At the time of the Q1 2023 reassessment, an increase in the reserve to the range of USD 40–50 million may be warranted, depending on the findings of the internal investigation and the economic analysis. We will provide an updated reserve recommendation at that time.
VII. D&O Insurance Considerations
TMC tendered notice of the DOJ investigation to Northland Mutual Insurance Co. ("Northland") on March 4, 2022, under Directors & Officers Liability Insurance Policy No. NMI-DO-2021-5547. The policy has a policy period of July 1, 2021, through July 1, 2022, and is renewed annually. The primary-layer policy provides an aggregate limit of liability of USD 50 million, subject to a per-claim retention (self-insured deductible) of USD 2.5 million.
Northland acknowledged TMC's notice of the investigation and confirmed coverage for defense costs incurred by individual directors and officers of TMC who may become the subject of the investigation. However, Northland issued a reservation of rights letter on approximately April 15, 2022, in which it reserved its rights regarding:
• Entity coverage: Northland questioned whether the policy's entity-coverage provisions extend to defense costs incurred by TMC as a corporate entity (as opposed to individual insureds) in connection with a criminal antitrust investigation;
• Regulatory/criminal exclusion: Northland reserved the right to deny coverage under the policy's exclusion for loss arising from the commission of a criminal act, pending the outcome of the investigation; and
• Penalties and fines exclusion: Northland noted that the policy excludes coverage for criminal fines and penalties, and reserved the right to deny coverage for any such amounts.
Calderwood & Harkness responded to Northland's reservation of rights on April 28, 2022, in a detailed letter contesting the applicability of the criminal-act exclusion at the pre-adjudication stage. Our position is that the criminal-act exclusion, which by its terms applies to losses "arising from" the commission of a deliberate criminal act, cannot be invoked until there has been a final, non-appealable adjudication of criminal conduct. At the pre-adjudication stage, TMC is entitled to the presumption of innocence, and the insurer cannot rely on unproven allegations to deny coverage for defense costs. This position is well supported by case law in the majority of jurisdictions that have addressed the issue.
In addition to the primary-layer coverage with Northland, TMC has notified its excess-layer carriers:
• Greystone Specialty Insurance Ltd. provides Layer 2 excess coverage of USD 25 million in excess of the USD 50 million Northland primary limit (i.e., coverage from USD 50 million to USD 75 million); and
• Sentinel Re Ltd. provides Layer 3 excess coverage of USD 25 million in excess of the USD 75 million aggregate of Layers 1 and 2 (i.e., coverage from USD 75 million to USD 100 million).
Both excess-layer carriers have acknowledged receipt of TMC's notice and have reserved their rights pending the outcome of the coverage determination at the primary level.
For purposes of the litigation reserve analysis, D&O insurance proceeds should not be factored into the reserve calculation under ASC 450 or IAS 37. This is the case for several reasons:
• Coverage remains actively disputed, and there is no assurance that Northland or the excess-layer carriers will ultimately agree to provide coverage for any portion of TMC's losses;
• The D&O policies cover defense costs rather than penalties or fines, and criminal antitrust fines and penalties are typically excluded from D&O coverage. Accordingly, even if the coverage dispute is resolved in TMC's favor, the insurance recovery would likely be limited to defense costs and would not offset the reserve for the potential penalty;
• Under ASC 450 and IAS 37, a contingent asset (such as an insurance recovery) is recognized separately from the related loss contingency and only when the recovery is "virtually certain" (IAS 37) or when the recovery is "probable" (ASC 450). Given the pending coverage dispute, neither standard is satisfied.
Any insurance recovery that is ultimately obtained would reduce TMC's out-of-pocket exposure and would be recognized as a separate asset (or offset to expense) when the conditions for recognition are met. The D&O coverage status will continue to be monitored and will be addressed in future reserve updates.
VIII. Public Disclosure Considerations
TMC's public disclosure obligations in connection with the DOJ investigation arise under both U.S. securities law (as a foreign private issuer listed on the NYSE and filing annual reports on SEC Form 40-F) and Canadian securities law (as a reporting issuer subject to continuous disclosure obligations under National Instrument 51-102).
Initial Disclosure. TMC disclosed the existence of the DOJ investigation in its fiscal year 2021 annual report, which was filed on SEDAR+ (Canada) and with the SEC on Form 40-F on March 28, 2022. The disclosure was included in the "Contingencies" note to TMC's audited consolidated financial statements and in the "Legal Proceedings" section of the Management's Discussion and Analysis. The disclosure language described the matter as a pending government investigation into pricing practices in the North American specialty-minerals sector, noted that TMC had received a grand jury subpoena and was cooperating with the investigation, established a litigation reserve of USD 30 million, and indicated that the ultimate outcome of the investigation cannot be predicted with certainty and that the actual loss may differ materially from the amount reserved. The disclosure did not reference the target letter (which was received subs

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