CALDERWOOD & HARKNESS LLP 450 Park Avenue New York, New York 10022
PRIVILEGED AND CONFIDENTIAL — ATTORNEY WORK PRODUCT
MEMORANDUM
Date: March 23, 2022
To: Vivienne St. Claire, Responsible Partner, Capital Markets
From: Audrey Zhou, Lead Associate, Capital Markets
Re: 10b-5 / Negative Assurance Analysis — Torchlight Mining Corp. $300,000,000 8.750% Senior Secured Notes due 2029 (Rule 144A / Regulation S)
Matter No.: 1039-00002
Reviewed and approved by Vivienne St. Claire on March 24, 2022.
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I. Purpose and Summary
The purpose of this memorandum is to analyze whether Calderwood & Harkness LLP ("C&H" or the "Firm") has an adequate basis to deliver a customary 10b-5 negative assurance letter (sometimes referred to as a "10b-5 letter" or "negative assurance letter") to Kelvantis Capital Markets LLC, as lead initial purchaser and book-running manager (the "Lead Initial Purchaser"), Prestige Barrington & Co., Inc., as co-manager, and Halcyon Securities Inc., as co-manager (together with the Lead Initial Purchaser, the "Initial Purchasers"), in connection with the Rule 144A / Regulation S offering (the "Offering") of $300,000,000 aggregate principal amount of 8.750% Senior Secured Notes due 2029 (the "Notes") by Torchlight Mining Corp., a corporation organized under the Canada Business Corporations Act (the "Issuer" or "Torchlight").
The delivery of the negative assurance letter is a condition to closing under the Purchase Agreement dated as of March 29, 2022 (the "Purchase Agreement"), among the Issuer, the Guarantors (as defined therein), and the Initial Purchasers. The anticipated closing date is April 19, 2022, as extended from the original closing date of April 5, 2022 to accommodate timing associated with Canadian regulatory clearance. The Purchase Agreement sets forth the terms and conditions pursuant to which the Initial Purchasers have agreed to purchase the Notes from the Issuer for resale to qualified institutional buyers ("QIBs") in reliance on Rule 144A under the Securities Act of 1933, as amended (the "Securities Act"), and to certain persons in offshore transactions in reliance on Regulation S under the Securities Act.
Clairmont & Voss LLP (lead partner: Harrison Voss; associate: Nadia Petrov; matter reference: 1039-00002) acts as U.S. counsel to the Initial Purchasers in connection with the Offering and will be a recipient of the 10b-5 letter. In that capacity, Clairmont & Voss has been engaged in independent due diligence on behalf of the Initial Purchasers and has coordinated with C&H on the scope and process of the diligence investigation described herein.
Summary Conclusion. Based on the due diligence process described in detail below, and subject to the completion of the identified open items set forth in Section V of this memorandum, it is our view that the Firm has a reasonable basis to deliver the customary 10b-5 negative assurance letter at closing. Nothing has come to our attention in the course of this investigation that causes us to believe that the Final Offering Memorandum (as defined below), as of its date or as of the date of this memorandum, contains an untrue statement of a material fact or omits to state a material fact necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading, subject to the customary exclusions described in Section VI below.
II. Legal Framework
A. Section 10(b) and Rule 10b-5 — Overview
Section 10(b) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), makes it unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce, or of the mails, or of any facility of any national securities exchange, to use or employ, in connection with the purchase or sale of any security, any manipulative or deceptive device or contrivance in contravention of such rules and regulations as the Securities and Exchange Commission (the "SEC") may prescribe. Rule 10b-5 promulgated by the SEC under Section 10(b) provides, in pertinent part, that it shall be unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce, or of the mails, or of any facility of any national securities exchange:
(a) to employ any device, scheme, or artifice to defraud;
(b) to make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading; or
(c) to engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person,
in connection with the purchase or sale of any security. The prohibition under clause (b) is of primary relevance to the negative assurance analysis, as it imposes liability for material misstatements and omissions in offering documents, including offering memoranda used in exempt transactions.
Although the Offering is structured as a private placement exempt from registration under Section 5 of the Securities Act — with Notes offered and sold in the United States to QIBs in reliance on Rule 144A and outside the United States in reliance on Regulation S — the anti-fraud provisions of Section 10(b) of the Exchange Act and Rule 10b-5 thereunder apply to all securities transactions, regardless of whether the securities are registered under the Securities Act. This is a well-established principle of federal securities law. The exemption from registration under Rule 144A and Regulation S provides no exemption from the anti-fraud provisions, and participants in Rule 144A / Regulation S offerings — including the issuer, the initial purchasers, and their respective counsel — remain subject to potential liability under Section 10(b) and Rule 10b-5 if the offering memorandum contains material misstatements or omissions.
In this context, the Initial Purchasers customarily require the issuer's counsel to deliver a negative assurance letter as part of the diligence process undertaken by the Initial Purchasers in connection with the Offering. While there is no statutory or regulatory requirement that issuer's counsel deliver such a letter, the practice is deeply embedded in capital markets transactions and serves as an important component of the Initial Purchasers' due diligence defense against potential claims arising under Section 10(b) and Rule 10b-5. The delivery of the negative assurance letter also serves to provide assurance to the Initial Purchasers that counsel to the issuer, having conducted an independent investigation of the disclosure, has not identified material deficiencies in the offering memorandum.
B. The Negative Assurance Standard
The customary formulation of the 10b-5 negative assurance, as expected to be included in the letter to be delivered at closing, is as follows:
"Based upon and subject to the foregoing, nothing has come to our attention that causes us to believe that the Final Offering Memorandum, as of its date and as of the date hereof, contains an untrue statement of a material fact or omits to state a material fact necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading."
This formulation reflects a belief-based standard, rather than a guarantee or certification of accuracy. The negative assurance letter does not constitute an opinion of law, nor does it provide an assurance or guarantee that the Final Offering Memorandum is free of all misstatements or omissions. Rather, it communicates that, having conducted a reasonable investigation of the kind customarily undertaken in connection with transactions of this nature, counsel has not identified any information that would cause it to believe that the offering memorandum is materially deficient. The negative assurance standard reflects the practical limits of counsel's role in the due diligence process: counsel is not an auditor, engineer, or financial advisor, and counsel's review necessarily depends in part on the accuracy and completeness of information furnished by the issuer, its management, and its other advisors.
The scope of the negative assurance covers the Final Offering Memorandum dated March 14, 2022 (the "Final Offering Memorandum" or the "Offering Memorandum"), as supplemented or amended through the closing date. For the avoidance of doubt, the negative assurance extends to the Final Offering Memorandum as a whole, including any supplements or amendments thereto, but subject to the customary exclusions described in Section VI.A below. The customary exclusions from the scope of the negative assurance include, among other items: (i) financial statements, financial schedules, and related notes; (ii) NI 43-101 technical data and mineral resource estimates; (iii) forward-looking statements and projections; and (iv) statistical data derived from third-party sources.
C. Due Diligence as the Foundation
The ability of issuer's counsel to deliver the 10b-5 negative assurance letter is grounded in the conduct of a "reasonable investigation" or due diligence process. The ABA TriBar Opinion Committee has articulated guidelines for the conduct of due diligence by counsel in connection with securities offerings, and these guidelines, together with prevailing market practice, inform the scope and depth of the investigation that counsel is expected to undertake. While the TriBar guidelines are not binding legal authority, they represent a widely accepted articulation of professional standards and best practices in the capital markets bar.
The key components of a reasonable investigation, as relevant to the present Offering, include:
(i) review of the Offering Memorandum in all its iterations, from initial draft through final form, to assess the completeness and accuracy of the disclosure;
(ii) review of the material underlying documents and agreements referenced in or relevant to the disclosure, including the Indenture, the Purchase Agreement, the Security Agreements, the Collateral Agency Agreement, the Registration Rights Agreement, organizational documents of the Issuer and each Guarantor, and material commercial contracts;
(iii) management interviews and presentations, including sessions with senior officers of the Issuer and its operating subsidiaries addressing corporate strategy, financial performance, operations, litigation, regulatory compliance, and other material matters;
(iv) review of independent expert reports, including the independent engineer's report prepared in accordance with NI 43-101 standards;
(v) review of the auditors' comfort letter, including both the initial comfort letter delivered at signing and the bring-down comfort letter to be delivered at closing;
(vi) review of public filings, regulatory filings, and material contracts, including continuous disclosure filings on the Toronto Stock Exchange ("TSX"), litigation and lien searches, and corporate good standing/existence certifications; and
(vii) bring-down diligence to be conducted at or prior to closing, including receipt of officer's certificates and bring-down comfort letters confirming the continued accuracy of representations and the absence of material adverse changes.
The reasonableness of the investigation is measured in light of the nature and complexity of the transaction. The present Offering involves a number of features that inform the scope and depth of the required diligence, including that: (a) the Issuer is a Canadian corporation listed on the TSX, subject to Canadian securities laws and corporate legislation, requiring coordination with Canadian counsel; (b) the Notes are being offered in a high-yield format with a below-investment-grade credit profile (B1/B+), warranting heightened attention to risk factor disclosure and leverage-related matters; (c) the Issuer operates in the mining sector, which involves specialized operational, environmental, and technical risks requiring reliance on independent engineering expertise; (d) the Offering involves a cross-border element, with the Issuer and two Guarantors organized under Canadian law and one Guarantor organized under Delaware law; and (e) the proceeds of the Offering will be used in significant part to fund a major capital expansion project (Phase II), the execution risk of which is a material element of the disclosure.
III. Due Diligence Process Conducted
A. Document Review
C&H conducted a comprehensive review of the documents and materials described below in connection with the Offering. The document review was conducted principally by the undersigned, with assistance from Brendan Walsh, working associate, and under the supervision of Vivienne St. Claire, responsible partner. Documents were organized and maintained in the Firm's electronic deal room (Thackeray Solutions workspace) and supplemented with hard-copy materials provided by the Issuer and its advisors.
Offering Memorandum. C&H reviewed all drafts of the Preliminary Offering Memorandum, commencing with the first draft circulated on February 4, 2022, through each subsequent marked and clean version, culminating in the Final Offering Memorandum dated March 14, 2022. This review encompassed not only the textual disclosure sections but also the financial statements, pro forma adjustments, risk factors, and appendices included therein. C&H participated actively in the drafting and commenting process, providing markup and comments on each draft, and coordinating with Clairmont & Voss LLP, Pendleton Ross LLP, and the Issuer's management team to resolve open issues in the disclosure. A detailed log of all comments and resolutions was maintained by Brendan Walsh.
Transaction Documents. C&H reviewed the following principal transaction documents in their negotiated and, where applicable, execution form:
• The Indenture, to be dated as of the closing date, among the Issuer, the Guarantors, and Meridian Trust Company, National Association, as trustee and collateral agent (the "Trustee");
• The Purchase Agreement, dated as of March 29, 2022, among the Issuer, the Guarantors, and the Initial Purchasers;
• The Registration Rights Agreement, to be dated as of the closing date, among the Issuer, the Guarantors, and the Initial Purchasers;
• The U.S. Security Agreement, to be dated as of the closing date, between Torchlight U.S. Holdings, Inc. and the Trustee (as collateral agent);
• The Canadian General Security Agreement, to be dated as of the closing date, among the Issuer, Wolverine Lake Mining Ltd., Torchlight Milling & Processing Inc., and the Trustee (as collateral agent);
• The Collateral Agency Agreement, to be dated as of the closing date, among the Issuer, the Guarantors, the Trustee (as collateral agent), and the holders of Notes from time to time.
Organizational Documents. C&H reviewed the articles of incorporation, bylaws, and, where applicable, amendments thereto, for each of the following entities:
• Torchlight Mining Corp., a corporation organized under the Canada Business Corporations Act ("CBCA");
• Wolverine Lake Mining Ltd. ("WLML"), a corporation organized under the laws of the Province of Ontario;
• Torchlight Milling & Processing Inc. ("TMPI"), a corporation organized under the laws of the Province of Ontario; and
• Torchlight U.S. Holdings, Inc. ("TUSHI"), a corporation organized under the laws of the State of Delaware (EIN: 84-3921057).
Existing Credit Facilities. C&H reviewed the amended and restated credit agreement dated November 18, 2019 (as further amended), among the Issuer, as borrower, Ridgeline Bank of Canada, as administrative agent and lender, and the other lenders party thereto, providing for a CAD $225,000,000 revolving credit facility (the "Ridgeline Revolver"). As of January 31, 2022, the most recent monthly reporting date reviewed, CAD $140,000,000 was drawn under the Ridgeline Revolver. As disclosed in the Final Offering Memorandum and confirmed through management representations, the Ridgeline Revolver is to be repaid in full at closing using a portion of the net proceeds of the Offering, and the facility will be terminated upon such repayment. C&H reviewed the intercreditor and payoff mechanics associated with the Ridgeline Revolver repayment.
Material Commercial Agreements. C&H reviewed the Issuer's and its subsidiaries' material offtake agreements, mining services contracts, and government permits, including:
• The nickel concentrate offtake agreement with Sumida Metals Trading AG, dated June 15, 2018 (as amended), providing for the sale of up to 100% of Phase I nickel-in-concentrate production;
• The copper concentrate offtake agreement with Palisade Commodity Solutions Inc., dated September 3, 2019, covering Phase I copper-in-concentrate production;
• The mining services contract with Boreal Underground Services Ltd., dated February 1, 2020, covering underground development and production drilling services at the Wolverine Lake mine; and
• Key government permits, including the Ontario Ministry of Northern Development, Mines, Natural Resources and Forestry ("MNDMNRF") mining lease for the Wolverine Lake property and the Environmental Compliance Approval under the Ontario Environmental Protection Act.
Mining Claims and Surface Rights. C&H reviewed documentation relating to the Ontario mining claims held by WLML, specifically Ontario Mining Claim Nos. WL-4492-01 through WL-4492-47, which collectively cover the 12,400-hectare Wolverine Lake property located approximately 85 km northeast of Thunder Bay, Ontario. C&H also reviewed the surface rights documentation, including the mining lease and related access agreements, to confirm the descriptions appearing in the Offering Memorandum.
TSX Continuous Disclosure Filings. C&H reviewed the Issuer's continuous disclosure filings on the TSX and SEDAR, including:
• Annual Information Form for the fiscal year ended December 31, 2021 (filed March 1, 2022);
• Management Information Circular dated April 12, 2021, for the 2021 Annual General Meeting of Shareholders;
• Audited consolidated financial statements for the fiscal years ended December 31, 2021 and 2020 (filed March 1, 2022); and
• Material change reports filed during the 12-month period preceding the date of this memorandum.
Board Resolutions. C&H reviewed the resolutions of the board of directors of each of Torchlight Mining Corp., WLML, TMPI, and TUSHI, authorizing the Offering, the issuance of the Notes, the execution and delivery of the Guarantees, and the execution and delivery of the Security Agreements and related transaction documents. In each case, C&H confirmed that the resolutions were duly adopted, that a quorum was present, and that the authorizations are consistent with the actions contemplated by the transaction documents.
Separate Due Diligence Memoranda. In connection with the Offering, C&H has prepared the following separate due diligence memoranda, each of which is incorporated by reference into this analysis:
• Corporate & Organizational Due Diligence Memorandum (C&H Ref. DD-2022-0471-01);
• Material Contracts & Mining Rights Due Diligence Memorandum (C&H Ref. DD-2022-0471-02);
• Environmental & Regulatory Due Diligence Memorandum (C&H Ref. DD-2022-0471-03); and
• Litigation & Contingencies Due Diligence Memorandum (C&H Ref. DD-2022-0471-04).
The findings set forth in each of these memoranda have been taken into account in reaching the conclusion expressed in this memorandum.
B. Management Presentations and Interviews
C&H participated in extensive management presentations and interviews conducted over a three-day period from February 14 through February 16, 2022. The presentations were held at Torchlight's corporate headquarters at 2200 – 400 Burrard Street, Vancouver, British Columbia, with certain participants joining via secure videoconference.
The management presentation sessions were structured to cover the principal areas of disclosure in the Offering Memorandum and to provide counsel and the Initial Purchasers with the opportunity to question senior management regarding the Issuer's business, operations, financial condition, and prospects. The presenters and the topics covered during the sessions are summarized below:
Magnus Thornberg, Chief Executive Officer. Mr. Thornberg presented on the Issuer's corporate strategy, the strategic rationale for the Phase II expansion of the Wolverine Lake mine, and the Issuer's view of the market outlook for nickel and copper. Mr. Thornberg addressed the competitive positioning of the Wolverine Lake mine within the Canadian base metals mining sector, the Issuer's relationship with key offtake counterparties, and the anticipated timeline and milestones for the Phase II expansion. He also discussed the Issuer's broader growth strategy and potential opportunities for further resource development within the existing mining claim area.
Lianne Prokopchuk, Chief Financial Officer (CPA, CFA). Ms. Prokopchuk presented a detailed financial overview, including the Issuer's audited financial results for the fiscal year ended December 31, 2021, which reflected revenue of CAD $612.4 million and Adjusted EBITDA of CAD $189.7 million (each as reported in the Offering Memorandum). Ms. Prokopchuk reviewed the Issuer's capitalization table on a pro forma basis giving effect to the Offering and the application of proceeds, including the repayment of the Ridgeline Revolver. She addressed the use of proceeds in detail, confirming the allocation as described in the Offering Memorandum. Ms. Prokopchuk also discussed the Issuer's debt service capacity, liquidity position, compliance with existing financial covenants, and the anticipated impact of the Phase II capital expenditure program on the Issuer's leverage and coverage ratios.
Deepak Rathore, General Counsel & Corporate Secretary. Mr. Rathore presented on the Issuer's litigation exposure, regulatory compliance posture, and material contractual arrangements. He confirmed that, other than the matters disclosed in the Offering Memorandum under "Risk Factors" and "Business — Legal Proceedings," there are no pending or threatened legal proceedings against the Issuer or any of its subsidiaries that, individually or in the aggregate, would be material to the Issuer. Mr. Rathore also addressed the Issuer's compliance with applicable mining regulations, environmental laws, and securities regulatory requirements. He reviewed the status of key material contracts, including the nickel and copper offtake agreements, and confirmed the absence of any defaults or pending disputes thereunder.
Colleen Hébert, Treasurer (CPA). Ms. Hébert addressed treasury operations, cash management practices, hedging strategy (including the Issuer's use of forward contracts and collar structures to manage nickel and copper price exposure), and working capital management. She discussed the Issuer's banking relationships and the anticipated post-closing liquidity position.
Stavros Katsaros, General Manager, Mine Operations (Wolverine Lake Mining Ltd.). Mr. Katsaros provided a detailed operational overview of the Wolverine Lake mine, including current Phase I production data. Phase I production was reported at approximately 18,000 tonnes of nickel-in-concentrate and approximately 6,100 tonnes of copper-in-concentrate on an annualized basis. Mr. Katsaros discussed the Phase II expansion targets, which anticipate increasing production to approximately 28,500 tonnes of nickel-in-concentrate and approximately 9,600 tonnes of copper-in-concentrate upon full commissioning. He discussed the remaining mine life for Phase I (estimated at 14 years based on current reserves), the Phase II construction timeline (construction commencement targeted for Q2 2022, with completion and commissioning targeted for Q4 2024), and the capital cost estimate for Phase II (CAD $215 million, equivalent to approximately USD $169 million based on the assumed exchange rate of 0.7875 CAD/USD). Mr. Katsaros also addressed geotechnical conditions, mine ventilation, water management, and safety performance.
Representatives of the Initial Purchasers. The following representatives of the Initial Purchasers attended and participated in the management presentation sessions:
• Julian Marchetti, Head of High Yield Origination, Metals & Mining, Kelvantis Capital Markets LLC;
• Christine Yee, Managing Director, Syndicate, Kelvantis Capital Markets LLC;
• Keith O'Sullivan, Managing Director, Debt Capital Markets, Prestige Barrington & Co., Inc.; and
• Priya Mehrotra, Director, High Yield, Halcyon Securities Inc.
Counsel to the Initial Purchasers. Harrison Voss (partner) and Nadia Petrov (associate) of Clairmont & Voss LLP participated in all three days of management presentations on behalf of the Initial Purchasers.
Notes and Records. Brendan Walsh, C&H working associate, prepared detailed contemporaneous notes of all management presentation sessions. These notes are maintained in the Firm's files for this matter and are available for review. The notes reflect both the substance of the presentations and the questions posed by counsel and by the Initial Purchasers' representatives, together with management's responses thereto.
Follow-Up Calls. Following the management presentations, C&H conducted follow-up calls with Lianne Prokopchuk (CFO) and Deepak Rathore (General Counsel) on February 22, 2022 and March 4, 2022. These calls were conducted to address specific questions that arose during the document review process, including questions regarding the treatment of certain environmental liabilities in the financial statements, the status of government permit renewals, the terms of certain mining services subcontracts, and the disclosure of related-party transactions. In each case, management provided responsive information, which was considered in connection with the review of the Offering Memorandum disclosure.
C. Independent Engineer's Report
Cascade Technical Advisors Inc. ("Cascade"), an independent mining engineering consulting firm based in Calgary, Alberta, delivered its independent engineer's report (the "Cascade Report") on February 28, 2022. The Cascade Report was prepared under the direction of Dr. Elaine Whitaker, P.Eng., a qualified person as defined under National Instrument 43-101 — Standards of Disclosure for Mineral Projects ("NI 43-101").
The Cascade Report covers the Wolverine Lake nickel-copper mine, which is located on the 12,400-hectare Wolverine Lake property approximately 85 km northeast of Thunder Bay, Ontario. The Cascade Report addresses the following principal topics:
• Mineral Resource Estimates (NI 43-101 Compliant): The Cascade Report presents mineral resource estimates prepared in accordance with NI 43-101 and the Canadian Institute of Mining, Metallurgy and Petroleum ("CIM") Definition Standards. The estimates are as follows: Measured & Indicated resources of 48.2 million tonnes at an average grade of 1.12% nickel and 0.38% copper; Inferred resources of 11.7 million tonnes at an average grade of 0.94% nickel and 0.31% copper.
• Mine Plan: The Cascade Report describes the existing underground mine plan for Phase I operations and the proposed mine plan for the Phase II expansion, including the new decline ramp and ventilation raise required to access the Wolverine Deep zone.
• Phase II Expansion Feasibility: The Cascade Report addresses the technical and economic feasibility of the Phase II expansion, including detailed capital cost estimates, operating cost projections, and production ramp-up schedules.
• Production Projections: The Cascade Report presents production projections for both Phase I (current operations) and Phase II (expansion), consistent with the targets described by management during the presentations.
• Capital and Operating Cost Estimates: The Cascade Report provides detailed estimates of the capital expenditures required for the Phase II expansion (CAD $215 million) and the projected operating costs on a per-tonne basis following completion of the expansion.
• Geotechnical and Hydrogeological Conditions: The Cascade Report addresses ground conditions, rock quality, water inflow rates, and related geotechnical and hydrogeological factors relevant to the mine plan and the Phase II expansion.
C&H reviewed the Cascade Report in full. However, the technical data, mineral resource estimates, engineering assessments, and geological interpretations contained in the Cascade Report are beyond the scope of our legal expertise and are accordingly excluded from the scope of the negative assurance coverage, consistent with customary practice in mining-sector high-yield offerings. Our review of the Cascade Report was directed at confirming that the report's conclusions and key data points are accurately and fairly summarized in the relevant sections of the Final Offering Memorandum, including the sections entitled "Summary — The Wolverine Lake Mine," "Business and Properties," and "Risk Factors."
Based on our review, no inconsistencies were identified between the Cascade Report and the descriptions of technical, resource, and operational information contained in the Final Offering Memorandum.
D. Auditor's Comfort Letter
Aldgate Thornton LLP ("Aldgate Thornton"), the Issuer's independent auditors, has been engaged to deliver a customary comfort letter (the "Comfort Letter") addressed to the Initial Purchasers in connection with the Offering. The engagement partner is Francesca Hui, CPA, CA, of Aldgate Thornton's Vancouver office, located at 700 – 1055 Dunsmuir Street, Vancouver, BC V7X 1L4.
Pursuant to the terms of the Purchase Agreement, the Comfort Letter is to be delivered in two stages: (i) an initial comfort letter delivered at the date of execution of the Purchase Agreement (March 29, 2022), and (ii) a bring-down comfort letter to be delivered at closing (April 19, 2022). The bring-down comfort letter will confirm the continued applicability of the initial comfort letter as of the closing date and will address any changes in the specified financial line items during the intervening period.
The Comfort Letter covers the following principal areas:
(i) Auditors' Independence: Aldgate Thornton's confirmation that it is independent with respect to the Issuer within the meaning of the applicable rules of professional conduct and the requirements of the relevant securities regulatory authorities.
(ii) Compliance of Audited Financial Statements: Confirmation that the audited consolidated financial statements of the Issuer included in the Final Offering Memorandum have been prepared in accordance with International Financial Reporting Standards ("IFRS") as issued by the International Accounting Standards Board and comply as to form in all material respects with the applicable accounting requirements.
(iii) Agreed-Upon Procedures: Performance of specified agreed-upon procedures with respect to certain financial data, figures, and statistical information appearing in the Final Offering Memorandum (other than the audited financial statements), including reconciliation of such data to the Issuer's underlying accounting records and financial systems.
(iv) Negative Assurance on Unaudited Interim Financial Information: Negative assurance with respect to the unaudited interim consolidated financial statements of the Issuer included in the Final Offering Memorandum for the nine-month period ended September 30, 2021, stating that nothing has come to the auditors' attention that causes them to believe that such interim financial information is not presented fairly, in all material respects, in accordance with IFRS.
(v) No Material Adverse Change: Negative assurance that, during the period from the date of the most recent audited balance sheet included in the Final Offering Memorandum (December 31, 2021) to a specified cut-off date not more than five business days prior to the date of the Comfort Letter, there has been no change in specified financial line items (including total assets, total liabilities, shareholders' equity, revenue, and net income) that would constitute a material adverse change, except as disclosed in the Final Offering Memorandum or the Comfort Letter.
C&H has reviewed the form of the initial Comfort Letter and confirmed that its coverage is consistent with prevailing market practice for high-yield debt offerings and that it adequately addresses the financial data and statistical information referenced in the Final Offering Memorandum. The Comfort Letter is addressed to Kelvantis Capital Markets LLC, Prestige Barrington & Co., Inc., and Halcyon Securities Inc., as Initial Purchasers. C&H will review the final executed version of the initial Comfort Letter upon delivery at signing and will review the bring-down Comfort Letter at closing as a condition to delivery of the 10b-5 letter.
E. Credit Ratings and Rating Agency Presentations
In connection with the Offering, the Issuer obtained the following credit ratings for the Notes:
• Northmark Ratings Group, Inc.: B1 (stable outlook), assigned March 7, 2022.
• Creston Analytics, Inc.: B+ (stable outlook), assigned March 7, 2022.
C&H reviewed the rating reports issued by Northmark Ratings Group, Inc. and Creston Analytics, Inc. in connection with the assignment of the foregoing ratings. The ratings are disclosed in the Final Offering Memorandum on the cover page and in the section entitled "Summary — The Offering."
C&H did not participate directly in the rating agency presentation sessions conducted by the Issuer's management and the Lead Initial Purchaser. However, C&H reviewed the presentation materials provided by Torchlight management and Kelvantis Capital Markets LLC for use in those sessions and confirmed that the information contained therein was consistent with the disclosure in the Final Offering Memorandum.
F. Canadian Counsel Coordination
Pendleton Ross LLP ("Pendleton Ross"), with lead partner Marie-Claire Bouchard (Securities & Corporate Finance), serves as Canadian counsel to the Issuer in connection with the Offering. Pendleton Ross's office is located at 3400 – 1 First Canadian Place, Toronto, ON M5X 1A4.
C&H coordinated extensively with Pendleton Ross on matters of Canadian law relevant to the disclosure in the Offering Memorandum and to the structuring and execution of the Offering. The principal areas of coordination included:
• CBCA Corporate Authority and Governance: Pendleton Ross advised on the corporate authority of the Issuer under the CBCA to issue the Notes, grant the security interests contemplated by the Canadian General Security Agreement, and enter into the other transaction documents. C&H reviewed the Pendleton Ross analysis and confirmed that the Offering Memorandum accurately describes the corporate governance structure and authority of the Issuer.
• Canadian Securities Regulatory Framework: Pendleton Ross advised on the application of Canadian securities laws to the Offering, including the notification requirements of the TSX in connection with the issuance of the Notes and the exemptions available under Canadian securities legislation from Canadian prospectus requirements for the Offering. C&H reviewed this analysis and confirmed that the relevant regulatory considerations are adequately addressed in the Offering Memorandum.
• Ontario Mining Legislation and Mineral Claims Status: Pendleton Ross provided advice on the status and validity of the Ontario mining claims (Ontario Mining Claim Nos. WL-4492-01 through WL-4492-47) held by WLML, including compliance with the Ontario Mining Act and applicable regulations governing claim maintenance, assessment work requirements, and royalty obligations. C&H reviewed this advice in connection with the disclosure in the Offering Memorandum relating to the Issuer's mining rights.
• Environmental and Regulatory Compliance: Pendleton Ross advised on compliance with Ontario and federal Canadian environmental legislation, including the Ontario Environmental Protection Act, the Ontario Water Resources Act, the Canadian Environmental Protection Act, 1999, and the Impact Assessment Act (Canada), as applicable to the Wolverine Lake mine operations and the proposed Phase II expansion. C&H reviewed this advice in connection with the environmental risk factor disclosure and the business description in the Offering Memorandum.
C&H has reviewed the form of Pendleton Ross's Canadian law opinion letter, which is to be delivered at closing and will address the due organization, valid existence, and corporate authority of the Issuer and the Canadian Guarantors (WLML and TMPI), the due authorization, execution, and delivery of the transaction documents by the Issuer and the Canadian Guarantors, and the enforceability of the Guarantees and the Canadian General Security Agreement under applicable Canadian law. The receipt of the Pendleton Ross opinion in final form is a condition to delivery of the 10b-5 letter.
A separate Canadian Securities Law Issues Memorandum has been prepared by C&H in coordination with Pendleton Ross and is maintained in the Firm's files for this matter (C&H Ref. DD-2022-0471-05).
G. Site Visit
Brendan Walsh, C&H working associate, conducted a site visit to the Wolverine Lake mine on February 15, 2022, during the management presentation sessions. The site visit was conducted under the guidance of Stavros Katsaros, General Manager, Mine Operations, and included observation of the following:
• Surface facilities, including the mine portal, headframe, and administrative buildings;
• Underground mining operations, including active production stopes and development headings;
• The concentrator facilities operated by Torchlight Milling & Processing Inc., including crushing, grinding, flotation, and concentrate handling and storage areas; and
• The proposed Phase II decline ramp area, including the surface location of the planned portal and the preliminary earthworks undertaken in connection with site preparation.
The site visit provided an opportunity to observe firsthand the scale and condition of the mining operations and to assess the consistency of the descriptions in the Offering Memorandum with actual site conditions. Based on the site visit, no material discrepancies were observed between the conditions at the mine site and the descriptions in the Final Offering Memorandum. Mr. Walsh prepared a memorandum summarizing his observations during the site visit, which is maintained in the Firm's files.
H. Public Records and Regulatory Filings Review
C&H conducted or caused to be conducted searches of public records for litigation, liens, and judgments involving the Issuer and each subsidiary Guarantor in the following jurisdictions:
• Province of Ontario (Ontario Superior Court of Justice; Ontario Court of Appeal; PPSA registrations);
• Province of British Columbia (British Columbia Supreme Court; British Columbia Court of Appeal; PPSA registrations);
• State of Delaware (Delaware Court of Chancery; Delaware Superior Court; UCC filings); and
• Federal courts (Federal Court of Canada; United States District Courts for the Southern District of New York and the District of Delaware).
C&H also reviewed good standing and/or existence certificates for each entity, obtained from the relevant corporate registry or secretary of state in each applicable jurisdiction. The results of the public records searches, including details of any identified liens, filings, and pending or resolved litigation matters, are set forth in the separate Litigation & Contingencies Due Diligence Memorandum (C&H Ref. DD-2022-0471-04) and the Corporate & Organizational Due Diligence Memorandum (C&H Ref. DD-2022-0471-01).
The PPSA (Ontario and British Columbia) and UCC (Delaware) searches were conducted to establish the current state of secured party registrations against the Issuer and each Guarantor and to identify any existing liens that would need to be addressed in connection with the grant of the first-priority security interest securing the Notes. The results of these searches have been reviewed and taken into account in connection with the security perfection analysis conducted separately by C&H.
IV. Review of the Final Offering Memorandum
A. Disclosure Sections Reviewed
C&H conducted a section-by-section review of the Final Offering Memorandum dated March 14, 2022, to assess the completeness and accuracy of the disclosure in light of the information obtained through the due diligence process described in Section III above. The principal sections reviewed, and the key elements confirmed, are summarized below.
Cover Page and Summary. C&H confirmed the accuracy of the summary offering terms appearing on the cover page and in the summary section of the Final Offering Memorandum, including the following:
• Aggregate principal amount: $300,000,000
• Interest rate: 8.750% per annum, payable semi-annually on April 15 and October 15
• Issue price: 98.50% of par
• Maturity date: April 15, 2029
• CUSIP (144A): 891207 AA 3
• CUSIP (Reg S): C89120 AA 5
• ISIN (144A): US891207AA38
• ISIN (Reg S): USC89120AA58
These terms are consistent with the Purchase Agreement and the Indenture.
Risk Factors. C&H reviewed the risk factors section for completeness and accuracy, giving particular attention to the adequacy of the disclosure in light of the Issuer's business, operations, financial condition, and the structure of the Offering. The risk factors address, among other topics:
• Mining operations risk, including underground mining hazards, geotechnical conditions, and equipment reliability;
• Commodity price volatility, including the Issuer's exposure to fluctuations in nickel and copper prices;
• Phase II execution risk, including construction cost overruns, permitting delays, and technical challenges associated with the Wolverine Deep zone;
• Canadian regulatory risk, including changes in mining laws, environmental regulations, and tax legislation;
• Environmental liability, including potential remediation obligations and the risk of environmental incidents;
• Leverage and debt service risk, including the Issuer's ability to generate sufficient cash flow to service its obligations under the Notes, the Guarantees, and any replacement revolving credit facility;
• Foreign exchange risk, including the exposure of USD-denominated debt obligations to fluctuations in the CAD/USD exchange rate; and
• Transfer restrictions applicable to the Notes under Rule 144A and Regulation S.
Based on our review, the risk factors section appears comprehensive and consistent with the information obtained through the due diligence process. No additional risk factors were identified that, in our judgment, should be added to the disclosure.
Use of Proceeds. C&H confirmed that the use of proceeds section is consistent with the representations of management, as presented by CFO Lianne Prokopchuk during the management presentations and confirmed through follow-up discussions. The application of the net proceeds of the Offering (estimated at $285,750,000, after deduction of the initial purchaser discount and estimated offering expenses) is as follows:
• Approximately $167,000,000 for Phase II capital expenditures at the Wolverine Lake mine;
• Approximately $110,250,000 for the repayment in full of the Ridgeline Bank of Canada revolving credit facility (CAD $140,000,000 converted at the assumed exchange rate of 0.7875 CAD/USD);
• Approximately $14,250,000 for transaction fees and expenses (including legal fees, printing, trustee fees, and rating agency fees); and
• Approximately $8,500,000 for general corporate purposes and working capital.
These figures are consistent with the Purchase Agreement and the capitalization table included in the Offering Memorandum.
Capitalization. C&H reviewed the capitalization table, including the pro forma adjustments giving effect to the Offering and the application of proceeds, against the representations of CFO Prokopchuk and the agreed-upon procedures performed by Aldgate Thornton as reflected in the Comfort Letter. The capitalization table was found to be consistent in all material respects with the underlying financial data.
Description of the Notes and the Indenture. C&H confirmed that the description of the Notes and the Indenture contained in the Final Offering Memorandum accurately summarizes the key terms and provisions of the Indenture. Among the terms confirmed are the following:
• Incurrence-based leverage covenant: maximum Total Debt to Consolidated EBITDA ratio of 3.75:1.00;
• Restricted payments basket: initial basket of $25,000,000, with additional capacity based on 50% of cumulative Consolidated Net Income;
• Restricted payments leverage ratio: maximum Total Debt to Consolidated EBITDA ratio of 3.00:1.00;
• Asset sale reinvestment period: 365 days from the date of receipt of net proceeds;
• Change of control put: 101% of principal amount;
• Optional redemption schedule:
• Prior to April 15, 2025: make-whole redemption at Treasury Rate plus 50 basis points;
• Equity clawback: up to 40% of original principal amount at 108.750% prior to April 15, 2025;
• On or after April 15, 2025: 104.375%;
• On or after April 15, 2026: 102.188%;
• On or after April 15, 2027: 100.000% (par);
• Annual financial reporting: within 90 days after fiscal year-end;
• Quarterly financial reporting: within 45 days after fiscal quarter-end (other than the fourth fiscal quarter).
Description of Security. C&H confirmed that the description of the collateral securing the Notes accurately reflects the terms of the U.S. Security Agreement, the Canadian General Security Agreement, and the Collateral Agency Agreement. The Notes are to be secured by a first-priority lien on substantially all tangible and intangible assets of the Issuer and the Guarantors, including:
• Mining rights and mineral claims (Ontario Mining Claim Nos. WL-4492-01 through WL-4492-47);
• Equipment, machinery, and rolling stock;
• Inventory (including ore, concentrate, and supplies);
• Accounts receivable;
• intellectual property;
• Intercompany notes; and
• Equity interests in each Guarantor subsidiary.
Guarantees. C&H confirmed that the disclosure accurately describes the Guarantees as joint and several senior secured guarantees provided by WLML, TMPI, and TUSHI. The Indenture requires that any future Restricted Subsidiary that, together with its subsidiaries, has total assets in excess of $5,000,000 must become a Guarantor within 30 days of the trigger event.
Business and Properties. C&H reviewed the business and properties section, which describes the Wolverine Lake mine, the 12,400-hectare property, the NI 43-101 mineral resource estimates, production history, and the Phase II expansion plans. This section was cross-checked against the Cascade Report, the management presentations, and the site visit observations.
Management. C&H confirmed the accuracy of the biographical information presented for the following members of senior management and the board of directors:
• Magnus Thornberg, Chief Executive Officer;
• Lianne Prokopchuk, Chief Financial Officer;
• Deepak Rathore, General Counsel & Corporate Secretary;