CALDERWOOD & HARKNESS LLP
MEMORANDUM
PRIVILEGED AND CONFIDENTIAL — ATTORNEY WORK PRODUCT
To: Vivienne St. Claire, Responsible Partner, Capital Markets
From: Audrey Zhou, Lead Associate, Capital Markets Brendan Walsh, Working Associate, Capital Markets
Date: February 10, 2022 (with updates through March 14, 2022)
Re: Canadian Securities Law Considerations — Torchlight Mining Corp. $300,000,000 8.750% Senior Secured Notes due 2029 — Rule 144A / Regulation S Offering
Matter No.: 1039-00002
Prepared in Coordination with: Pendleton Ross LLP (Marie-Claire Bouchard, Lead Partner, Securities & Corporate Finance), 3400 – 1 First Canadian Place, Toronto, Ontario M5X 1A4, Canada
This memorandum is intended solely for the internal use of Calderwood & Harkness LLP and is protected by the attorney-client privilege and the work product doctrine. This memorandum does not constitute an opinion of Calderwood & Harkness LLP on any matter of Canadian law. Canadian law opinions will be delivered by Pendleton Ross LLP, issuer's Canadian counsel, at closing. No portion of this memorandum may be disclosed to any third party without the prior written consent of Vivienne St. Claire.
Right-click to update Table of Contents
I. Executive Summary
This memorandum analyzes the Canadian securities law issues arising from the proposed offering by Torchlight Mining Corp. ("TMC" or the "Issuer"), a corporation incorporated under the Canada Business Corporations Act, R.S.C. 1985, c. C-44 (the "CBCA"), whose common shares are listed and traded on the Toronto Stock Exchange (the "TSX") under the ticker symbol "TMC," of $300,000,000 aggregate principal amount of 8.750% Senior Secured Notes due 2029 (the "Notes") in a Rule 144A / Regulation S high-yield offering. The Notes will be governed by New York law, issued under an indenture (the "Indenture") among TMC, the subsidiary guarantors, and Northern Dominion Trust Company, as trustee and collateral agent (the "Trustee"), and will be guaranteed on a senior secured basis by each of the Issuer's material subsidiaries.
TMC is a Canadian "reporting issuer" in all provinces and territories of Canada within the meaning of applicable Canadian provincial and territorial securities legislation. Its common shares are listed and posted for trading on the TSX and it is subject to continuous disclosure obligations under National Instrument 51-102 — Continuous Disclosure Obligations ("NI 51-102") as well as the timely disclosure policies of the TSX. The British Columbia Securities Commission (the "BCSC") serves as TMC's principal regulator under the passport system established by Multilateral Instrument 11-102 — Passport System.
The Notes are being offered and sold exclusively outside Canada: (a) in the United States to "qualified institutional buyers" (as defined in Rule 144A under the Securities Act of 1933, as amended (the "Securities Act")), and (b) outside the United States and Canada to non-U.S. persons (as defined in Regulation S under the Securities Act). No offering, sale, or distribution of the Notes is being made in Canada, and the transaction has been carefully structured to ensure that no distribution occurs within any Canadian jurisdiction.
The initial purchasers of the Notes are Kelvantis Capital Markets LLC (lead book-runner), Prestige Barrington & Co., Inc., and Halcyon Securities Inc. (collectively, the "Initial Purchasers"). All three are broker-dealers registered with the Financial Industry Regulatory Authority ("FINRA") in the United States. None of the Initial Purchasers is registered as a dealer in any province or territory of Canada.
Following our detailed analysis, conducted in coordination with Pendleton Ross LLP (Marie-Claire Bouchard, Lead Partner, Securities & Corporate Finance), the Issuer's Canadian counsel, our key conclusions are as follows:
(a) The offering is exempt from Canadian prospectus requirements because no distribution of Notes is being made in Canada. So long as the offering structure is maintained — with no offers or sales to any person in Canada — no Canadian prospectus is required and no exemption from prospectus requirements technically needs to be relied upon. Nonetheless, as a belt-and-suspenders measure, the offering has been structured to satisfy the conditions of National Instrument 72-503 — Distributions Outside Canada.
(b) TSX notification and approval obligations must be satisfied. TMC, as a TSX-listed issuer, is required to provide prior notice to the TSX of the issuance of the Notes. No TSX security holder approval is required because the Notes are not convertible into equity and the transaction does not trigger any of the thresholds set forth in Section 604 of the TSX Company Manual.
(c) Canadian continuous disclosure obligations remain applicable to TMC. The issuance of the Notes likely constitutes a "material change" in the affairs of TMC within the meaning of NI 51-102, requiring the filing of a material change report (Form 51-102F3) and the issuance of a press release. In addition, TMC's ongoing annual and interim disclosure filings will need to reflect the Notes as outstanding indebtedness.
(d) No Canadian securities regulatory approval or filing is required for the Notes themselves, provided the offering structure — prohibiting offers and sales in Canada — is maintained throughout.
(e) Coordination with Pendleton Ross LLP confirms alignment on all Canadian law matters addressed in this memorandum. Pendleton Ross LLP will deliver a Canadian law opinion letter at closing, addressed to the Initial Purchasers, covering the matters described in Section X below.
The closing of the offering is currently scheduled for April 19, 2022, having been extended from the original target date of April 5, 2022 due in part to Canadian regulatory clearance timing, which included processing of the TSX notification and coordination of provincial Personal Property Security Act filings.
II. Background and Transaction Overview
A. The Issuer
Torchlight Mining Corp. is a corporation incorporated under the CBCA. TMC is principally engaged in the exploration, development, and operation of base metal mines in Ontario and British Columbia, with its flagship asset being the Wolverine Lake nickel-copper mine located approximately 85 kilometers northeast of Thunder Bay, Ontario. The key corporate details of the Issuer are as follows:
Legal Name: Torchlight Mining Corp.
Jurisdiction of Incorporation: Canada (CBCA)
Headquarters: 2200 – 400 Burrard Street, Vancouver, British Columbia V6C 3A6, Canada
Registered Office: 1600 – 925 West Georgia Street, Vancouver, British Columbia V6C 3L2, Canada
Senior Management:
• Chief Executive Officer: Magnus Thornberg
• Chief Financial Officer: Lianne Prokopchuk
• General Counsel & Corporate Secretary: Deepak Rathore
• Treasurer: Colleen Hébert
Board Chair: Ingrid Solheim (independent)
TSX Listing: Common shares listed under the ticker symbol "TMC"
Approximate Market Capitalization: CAD $1.87 billion (as of January 14, 2022)
FY 2021 Revenue: CAD $612.4 million
FY 2021 Adjusted EBITDA: CAD $189.7 million
Reporting Issuer Status: Reporting issuer in British Columbia, Alberta, Ontario, and all other Canadian provinces and territories
Principal Regulator: British Columbia Securities Commission (BCSC)
Auditors: Aldgate Thornton LLP, Vancouver, British Columbia (Engagement Partner: Francesca Hui, CPA, CA)
TMC is a "venture" stage company that has transitioned to an intermediate-producer profile. Its continuous disclosure record is current and complete, and it is in good standing with the BCSC and each of the other provincial and territorial securities regulatory authorities in Canada. TMC's management information circulars, annual information forms, and interim and annual financial statements are filed on the System for Electronic Document Analysis and Retrieval ("SEDAR") in accordance with applicable Canadian requirements.
B. The Guarantors
The Notes will be jointly and severally guaranteed (each, a "Guarantee") on a senior secured basis by the following wholly owned subsidiaries of TMC:
Wolverine Lake Mining Ltd. ("WLML")
WLML is a corporation incorporated under the laws of the Province of Ontario. It is the principal operating entity for the Wolverine Lake nickel-copper mine and holds the relevant Ontario mining claims and surface rights. WLML's registered office is located at 44 Lakeshore Boulevard, Wolverine Lake, Ontario P0L 1R0. WLML is not itself a "reporting issuer" in any Canadian jurisdiction and has no securities listed or traded on any exchange.
Torchlight Milling & Processing Inc. ("TMPI")
TMPI is a corporation incorporated under the laws of the Province of Ontario. It operates the concentrator and mineral processing facilities at the Wolverine Lake mine site and is responsible for the production of copper-nickel concentrate for shipment and sale. TMPI's registered office is also located at 44 Lakeshore Boulevard, Wolverine Lake, Ontario P0L 1R0. Like WLML, TMPI is not a "reporting issuer" in any Canadian jurisdiction.
Torchlight U.S. Holdings, Inc. ("TUSHI")
TUSHI is a corporation incorporated under the laws of the State of Delaware. It is a wholly owned subsidiary of TMC that holds U.S. offtake and marketing contracts relating to the sale of copper-nickel concentrate to U.S. purchasers. TUSHI's registered office is located at 1209 Orange Street, Wilmington, Delaware 19801. Its Employer Identification Number (EIN) is 84-3921057. As a U.S. corporation, TUSHI is not subject to Canadian securities law in its own right, although its Guarantee of the Notes and its grant of security interests in its assets are governed by New York law and the Uniform Commercial Code, as applicable. TUSHI is not a reporting issuer in Canada.
None of the subsidiary guarantors is itself a reporting issuer in Canada. The Canadian law analysis in this memorandum therefore focuses on the obligations and status of TMC, WLML, and TMPI as Canadian entities, while the analysis of TUSHI is addressed in separate memoranda prepared by the C&H team concerning U.S. law matters.
C. The Offering
The principal terms of the offering are as follows:
No public offering of the Notes is being made in Canada or in any other jurisdiction. The Notes have not been and will not be qualified for distribution to the public in Canada, and no prospectus has been or will be filed in any province or territory of Canada in respect of the Notes.
Use of Proceeds. TMC intends to apply the net proceeds of the offering as follows:
• $167,000,000 — Phase II expansion capital expenditure for the Wolverine Lake nickel-copper mine, including underground development, additional ventilation infrastructure, and surface facilities expansion (the "Phase II Expansion");
• $110,250,000 — payoff in full of the outstanding revolving credit facility with Ridgeline Bank of Canada (the "Ridgeline Facility"), currently drawn to CAD $140,000,000 (converted at USD/CAD 0.7875), accrued interest and breakage costs;
• $14,250,000 — payment of transaction fees and expenses, including Initial Purchaser discount, legal fees, trustee fees, printing, and rating agency fees;
• $8,500,000 — general corporate purposes and working capital.
Key Dates. The following timeline summarizes the critical dates for the offering:
The closing date was extended from the original target of April 5, 2022 to April 19, 2022. The extension was attributable in part to Canadian regulatory clearance timing, including processing of the TSX notification and finalization of the Personal Property Security Act registrations described in Section VII below, as well as completion of the Ridgeline Bank of Canada payoff arrangements.
D. Counsel and Coordination
The following law firms are engaged in connection with the offering and have been consulted in the preparation of this memorandum:
Calderwood & Harkness LLP (New York and Toronto) — Issuer's U.S. counsel. This memorandum is prepared as part of Calderwood & Harkness's internal analysis of the transaction. Calderwood & Harkness is not opining on any matter of Canadian law, and all Canadian law conclusions set forth in this memorandum are based on our consultations with Pendleton Ross LLP and are subject to the formal opinion to be delivered by Pendleton Ross at closing.
Pendleton Ross LLP (Toronto) — Issuer's Canadian counsel. Lead Partner: Marie-Claire Bouchard, Securities & Corporate Finance. Pendleton Ross LLP will deliver a Canadian law opinion letter at closing addressed to the Initial Purchasers and has been consulted on all Canadian law matters described in this memorandum. Pendleton Ross's offices are located at 3400 – 1 First Canadian Place, Toronto, Ontario M5X 1A4, Canada.
Clairmont & Voss LLP (New York) — Initial Purchasers' U.S. counsel. Lead Partner: Harrison Voss. Clairmont & Voss is responsible for the Initial Purchasers' due diligence, review of the Purchase Agreement, and delivery of the 10b-5 letter.
Greystone & Whitfield LLP (Toronto) — Initial Purchasers' Canadian counsel. Lead Partner: David Shin. Greystone & Whitfield has been engaged by the Initial Purchasers to advise on Canadian law matters from the Initial Purchasers' perspective, including review of the Canadian selling restrictions in the Offering Memorandum and Purchase Agreement.
III. Canadian Prospectus Requirements and Applicable Exemptions
A. Overview of Canadian Prospectus Regime
Canadian securities regulation is principally a matter of provincial and territorial jurisdiction. Each province and territory of Canada has enacted its own securities legislation, administered by a local securities commission or equivalent regulatory authority. These regimes are substantially harmonized through a series of "National Instruments" promulgated by the Canadian Securities Administrators (the "CSA"), but technically each province's legislation operates independently.
The cornerstone of Canadian investor protection is the prospectus requirement. National Instrument 41-101 — General Prospectus Requirements ("NI 41-101"), together with the applicable provincial securities acts (including the Securities Act (Ontario), R.S.O. 1990, c. S.5, and the Securities Act (British Columbia), R.S.B.C. 1996, c. 418), provides that any "distribution" of a security in a province or territory of Canada must be made pursuant to a prospectus that has been filed with and receipted by the applicable securities regulatory authority, unless an exemption from the prospectus requirement is available.
The term "distribution" is broadly defined under Canadian securities law. Under the Securities Act (Ontario), for example, a "distribution" includes a trade in a security of an issuer that has not been previously issued, or any trade by or on behalf of an issuer that is in the course of or incidental to a distribution of previously unissued securities. The definition is designed to capture the full range of transactions by which securities first enter the hands of investors, including both public offerings and private placements, subject only to the exemptions provided by law.
TMC, as a reporting issuer in all provinces and territories of Canada, is subject to these requirements in respect of any securities that it issues or distributes within Canada. The Notes, as newly issued debt securities, would constitute securities for purposes of Canadian securities legislation and their first issuance would constitute a "distribution" if it were to occur in any Canadian jurisdiction.
It is therefore essential to determine whether the offering of the Notes involves a "distribution" in any Canadian province or territory. As discussed in Section III.B below, the answer is that it does not.
B. No Distribution in Canada
The Notes are being offered and sold exclusively: (a) in the United States to qualified institutional buyers within the meaning of Rule 144A under the Securities Act, and (b) outside the United States and outside Canada to non-U.S. persons within the meaning of Regulation S under the Securities Act. The offering has been specifically structured so that no offer, sale, or distribution of Notes is made in Canada or to any person in Canada.
The following structural safeguards have been implemented to ensure that no distribution occurs in Canada:
Offering Memorandum Legends. The Offering Memorandum (final dated March 14, 2022) contains prominent legends on its cover page and in the selling restrictions section clearly stating that the Notes have not been and will not be qualified for distribution to the public under applicable Canadian securities legislation and may not be offered, sold, or distributed in Canada. The specific language of these legends is discussed in detail in Section IX.A below.
Purchase Agreement Representations. The Purchase Agreement, executed on March 29, 2022, contains representations from each of the Initial Purchasers that no offers or sales of the Notes will be made in Canada or to any person in Canada. Each of Kelvantis Capital Markets LLC, Prestige Barrington & Co., Inc., and Halcyon Securities Inc. is a U.S.-registered broker-dealer and none is registered as a dealer in any Canadian province or territory. The representations in the Purchase Agreement bind each Initial Purchaser contractually and provide a clear evidentiary record of the parties' intent to exclude Canada from the distribution.
Selling Restrictions. The selling restrictions section of the Offering Memorandum contains an express prohibition on offers and sales in Canada or to Canadian residents. These restrictions apply not only to the Initial Purchasers but also to any subsequent transferees of the Notes during the restricted period. The selling restrictions were drafted in coordination with Pendleton Ross LLP and Greystone & Whitfield LLP and reflect standard market practice for Canadian issuers conducting 144A/Reg S offerings.
No Marketing in Canada. No road show presentations, investor meetings, or other marketing activities have been conducted in Canada or directed at Canadian investors. The road show was conducted in New York, Boston, Chicago, Los Angeles, and London. We have confirmed with Julian Marchetti of Kelvantis Capital Markets LLC that no marketing materials were distributed to, and no investor meetings were held with, Canadian-resident investors.
Conclusion. Because no distribution of Notes is being made in Canada, no Canadian prospectus is required. Technically, no exemption from the prospectus requirement needs to be relied upon because the prospectus requirement is only triggered by a distribution in a Canadian jurisdiction. Nonetheless, as discussed in Section III.C below, the offering has been structured as a precautionary matter to satisfy the conditions of the safe harbour provided by National Instrument 72-503 — Distributions Outside Canada.
C. Potential Flowback Concerns
Even where an offering by a Canadian issuer is structured to exclude Canada, Canadian securities regulators have expressed concern about the potential for securities to "flow back" into Canada after the initial distribution. If Notes initially placed with non-Canadian investors were subsequently transferred to Canadian residents during the distribution period, such transfers could potentially be characterized as part of the initial distribution and thus subject to the prospectus requirement.
National Instrument 72-503 — *Distributions Outside Canada*. NI 72-503 (and its predecessor, OSC Rule 72-503) provides a safe harbour from the prospectus requirement for distributions made outside Canada by Canadian reporting issuers, subject to certain conditions. The principal conditions include:
(i) the distribution is made to persons outside Canada;
(ii) reasonable precautions are taken to ensure that the securities do not come to rest in Canada during the distribution period;
(iii) no selling efforts are directed at persons in Canada; and
(iv) the offering materials include appropriate legends to the effect that the securities have not been qualified for distribution in Canada.
Even though NI 72-503 is not technically required in the present case — because the 144A/Reg S structure does not target Canada and the Notes are being offered exclusively in the United States and to non-U.S. persons outside both the United States and Canada — as a belt-and-suspenders measure, the offering has been structured to satisfy its conditions. This approach provides an additional layer of protection and reflects a conservative reading of Canadian securities law that we and Pendleton Ross LLP believe to be prudent.
Regulation S Distribution Compliance Period. The Regulation S distribution compliance period (a 40-day restricted period commencing on the later of the closing date and the date on which the Regulation S Notes are first offered to persons other than the distributor) provides further protection against flowback to Canadian holders during the initial distribution period. During this period, the Regulation S Notes may only be transferred in accordance with the transfer restrictions set forth in the Regulation S legend and in compliance with the terms of the Indenture and the Offering Memorandum.
Book-Entry Mechanics. The Notes will be issued in global form and will be held through the facilities of The Depository Trust Company ("DTC") (for 144A Notes) and Stonefield Industries and Harborview Industries (for Regulation S Notes). These book-entry mechanics provide a further structural barrier against Canadian distribution because beneficial interests in the Notes are tracked through the DTC, Thackeray Partners LLC, and Ashgrove Enterprises systems and transfers between accounts are subject to the applicable rules and procedures of those depositories, including the transfer restrictions described in the Offering Memorandum.
Recommendation. We recommend that the selling restrictions and legends in the Offering Memorandum and Purchase Agreement be maintained in their current form in the final versions of those documents. We further recommend that Kelvantis Capital Markets LLC confirm in writing (or by e-mail from Julian Marchetti) that no offering efforts were directed at Canadian investors and that no offers or sales were made to persons in Canada. This confirmation should be obtained prior to closing and maintained in the transaction file.
D. Private Placement Exemptions — Not Relied Upon but Noted
For the sake of completeness, we note that Canadian securities legislation provides a number of exemptions from the prospectus requirement that could theoretically be relied upon if the Notes were to be offered to purchasers in Canada. These exemptions are set forth in National Instrument 45-106 — Prospectus Exemptions ("NI 45-106") and include, among others:
(i) Accredited Investor Exemption (NI 45-106, §2.3). The Notes could be sold to "accredited investors" as defined in NI 45-106 (which includes, inter alia, individuals meeting certain income or net asset thresholds, and institutional purchasers such as banks, trust companies, insurance companies, and registered investment dealers), provided the purchaser purchases as principal and not with a view to distribution.
(ii) Minimum Amount Investment Exemption (NI 45-106, §2.10). The Notes could be sold to purchasers who acquire a minimum aggregate acquisition cost of not less than CAD $150,000 paid in cash at the time of the distribution, provided the purchaser purchases as principal and not with a view to distribution.
We note, however, that reliance on either of these exemptions would trigger additional Canadian regulatory requirements. In particular:
• A Form 45-106F1 (Report of Exempt Distribution) would be required to be filed with the applicable Canadian securities regulatory authority within 10 days of the closing of the distribution;
• Securities acquired pursuant to a private placement exemption under NI 45-106 are generally subject to a hold period under National Instrument 45-102 — Resale of Securities (typically four months and one day for securities of a reporting issuer), during which the securities may not be resold in Canada except pursuant to another prospectus exemption; and
• The Issuer may be required to provide certain additional information to Canadian purchasers.
The firm's recommendation, concurred in by Pendleton Ross LLP, is to avoid any distribution of Notes to Canadian purchasers in order to maintain the clean structure described above. Introducing Canadian purchasers into the offering would increase regulatory complexity, require additional filings, and could potentially create transfer restriction issues that would be difficult to monitor and enforce in the context of a 144A/Reg S offering settled through DTC, Thackeray Partners LLC, and Ashgrove Enterprises.
IV. TSX Notification and Approval Requirements
A. TSX Company Manual — Issuance of Debt Securities
TMC's common shares are listed and posted for trading on the TSX. As a TSX-listed issuer, TMC is bound by the requirements of the TSX Company Manual (the "Manual"), which imposes certain notification, approval, and disclosure obligations on listed issuers in connection with significant corporate transactions.
Under the Manual, a listed issuer that issues debt securities is generally required to provide prior notice to the TSX. Specifically, Section 602 of the Manual requires that listed issuers notify the TSX in advance of any proposed issuance of securities (including debt securities) and provide the TSX with information regarding the principal terms of the issuance. In the case of the Notes, the notification must include, at a minimum, the following information:
• the aggregate principal amount of the Notes ($300,000,000);
• the coupon rate (8.750% per annum);
• the maturity date (April 15, 2029);
• the fact that the Notes are senior secured obligations guaranteed by certain subsidiaries;
• the use of proceeds;
• the structure of the offering (Rule 144A / Regulation S); and
• confirmation that the Notes are not being offered or distributed in Canada.
The Notes themselves are not being listed on the TSX, and no application for listing of the Notes has been or will be made. The TSX notification requirement is triggered by the fact that TMC, as a listed issuer, is issuing new securities, regardless of whether those securities are to be listed on the TSX.
Importantly, the issuance of the Notes does not trigger the "security holder approval" requirements set forth in Section 604 of the Manual. Section 604 requires shareholder approval for certain transactions, including (among others) equity issuances that materially dilute existing shareholders, the acquisition or disposition of material assets, and certain related party transactions. The issuance of the Notes does not fall within any of these categories because:
(a) the Notes are not convertible into equity and no warrants, options, or other equity-linked instruments are being issued in connection with the offering;
(b) no dilution of existing shareholders results from the issuance of debt securities; and
(c) the transaction does not constitute a "material change in the affairs" of the issuer that would require shareholder approval under the Manual (as distinguished from the continuous disclosure concept of "material change" under NI 51-102, which is addressed in Section V below).
B. TSX Notification Timing
TSX notification should be made promptly, and in any event prior to the closing of the offering. Pendleton Ross LLP (Marie-Claire Bouchard) will prepare and file the required notification on behalf of TMC using the standard TSX notification procedures. We understand that this filing has been initiated and that Pendleton Ross is coordinating directly with the TSX's Listed Company Services department.
In addition to the TSX notification, a material change report (Form 51-102F3) may also need to be filed if the issuance of the Notes constitutes a "material change" in the affairs of TMC, as discussed in Section V.A below. The TSX notification and the material change report are distinct filings with different purposes and recipients, but they should be coordinated to ensure consistency of disclosure.
We note that the extension of the closing date from April 5, 2022 to April 19, 2022 was attributable in part to Canadian regulatory clearance timing, which included the TSX notification processing period. We understand from Pendleton Ross that TSX clearance is expected to be obtained well in advance of the revised closing date and that no TSX objection or inquiry is anticipated.
C. TSX Personal Information Form Requirements
We have reviewed whether any officers or directors of TMC require updated TSX Personal Information Forms ("PIFs") in connection with the Notes offering. Under the Manual, PIFs are required to be filed when new directors, officers, or certain insiders of a listed issuer are appointed. The issuance of debt securities does not itself trigger a PIF requirement absent the appointment of new individuals to positions that require PIF filings.
We have confirmed with Deepak Rathore, TMC's General Counsel and Corporate Secretary, that no new directors or officers were appointed in connection with the offering and that no changes to the board or senior management have occurred since the last PIF update. Accordingly, no updated PIFs are required in connection with the Notes offering.
V. Continuous Disclosure Obligations
A. Material Change Reporting
TMC, as a reporting issuer in all Canadian provinces and territories, is subject to the continuous disclosure requirements of National Instrument 51-102 — Continuous Disclosure Obligations. Section 7.1 of NI 51-102 requires a reporting issuer to issue and file a "material change report" on Form 51-102F3 promptly, and in any event within 10 days, of any "material change" in its affairs. In addition, the reporting issuer must issue a news release forthwith upon becoming aware of the material change.
A "material change" is defined in the relevant securities legislation (see, e.g., Securities Act (Ontario), s. 1(1)) as:
"a change in the business, operations or capital of the issuer that would reasonably be expected to have a significant effect on the market price or value of any of the securities of the issuer"
and includes a decision to implement such a change made by the board of directors of the issuer (or by senior management with the expectation that the board of directors will confirm the decision).
Analysis — Whether the Notes Offering Constitutes a "Material Change." The issuance of $300,000,000 in new senior secured debt, the concomitant retirement of the existing Ridgeline Bank of Canada revolving credit facility (CAD $140 million drawn, CAD $225 million committed), and the funding of the Phase II Wolverine Lake mine expansion (CAD $215 million total estimated CapEx) are, taken together and individually, events that would likely be considered material to TMC's business, operations, and capital structure. This conclusion is supported by the following factors:
• The aggregate principal amount of the Notes ($300,000,000) represents a significant addition to TMC's balance sheet. For context, TMC's FY 2021 Revenue was CAD $612.4 million and its FY 2021 Adjusted EBITDA was CAD $189.7 million. The Notes will be the largest single debt instrument on TMC's balance sheet and will fundamentally alter its capital structure.
• The retirement of the Ridgeline Facility eliminates TMC's primary source of revolving credit and replaces it with long-term fixed-rate debt. The terms of the Notes (including the fixed 8.750% coupon and the seven-year maturity) differ substantially from the terms of the Ridgeline Facility (which bore interest at a floating rate tied to Canadian prime plus a margin).
• The Phase II Expansion is a transformational project that is expected to increase the production capacity of the Wolverine Lake mine by approximately 40% and represents the single largest capital commitment in TMC's history.
• The encumbrance of substantially all of the Canadian grantors' tangible and intangible assets under the Canadian General Security Agreement is a significant event that affects the rights and interests of TMC's other stakeholders.
In our view, the issuance of the Notes and the related transactions clearly constitute a "material change" within the meaning of applicable Canadian securities legislation.
Recommendation. TMC should file a material change report on Form 51-102F3 and issue a corresponding press release promptly upon pricing (March 25, 2022) or, at the latest, upon closing (April 19, 2022). We recommend that the press release be issued upon pricing, as the material terms of the offering will have been determined at that time and the information will be price-sensitive. Pendleton Ross LLP should be consulted on the form and content of the material change report, and Deepak Rathore should coordinate the timing and content with TMC's investor relations team.
We have also considered whether TMC might request confidential filing treatment for the material change report. Under NI 51-102, §7.1(2), a reporting issuer may file a confidential material change report if the issuer reasonably believes that disclosure of the material change would be unduly detrimental to the interests of the issuer, provided certain conditions are met. In our view, confidential filing treatment is unlikely to be appropriate here, as TMC will presumably want to — and indeed will be required to — announce the offering publicly in connection with the press release and the Offering Memorandum. Furthermore, the information will already be known to the market through the marketing process. We recommend against seeking confidential filing treatment.
B. News Release Requirements
The TSX Timely Disclosure Policy (the "TSX Policy") requires a TSX-listed issuer to issue a press release disclosing any material change before the opening of trading following the event. This requirement is in addition to the material change report filing obligation under NI 51-102 and is designed to ensure that all market participants have access to material information on a timely and equitable basis.
A press release should be issued promptly upon pricing (March 25, 2022) describing the principal terms of the Notes, including the aggregate principal amount, the coupon, the maturity, the security package, and the intended use of proceeds. A further press release should be issued upon closing (April 19, 2022) confirming the completion of the offering and the actual net proceeds received.
The content and timing of the press releases should be coordinated with Deepak Rathore and TMC's investor relations team. We have advised Deepak Rathore that the press releases should contain appropriate disclaimers to ensure that they do not constitute an offer to sell or a solicitation of an offer to buy the Notes in Canada or any other jurisdiction where such an offer or solicitation would be unlawful. Standard disclaimer language has been provided to Pendleton Ross LLP for inclusion in the press release drafts.
C. Annual and Interim Filing Obligations
TMC's ongoing continuous disclosure filings — including its annual information form (the "AIF"), management's discussion and analysis ("MD&A"), and interim and annual financial statements — will need to reflect the Notes as outstanding indebtedness following the closing of the offering. Specifically:
• TMC's next annual financial statements (for the fiscal year ended December 31, 2022) and the related MD&A and AIF will need to describe the Notes, the Guarantees, the security package, and the use of proceeds. The financial statements will need to include appropriate note disclosures regarding the Notes, including the fair value of the debt, the effective interest rate, and any related derivative instruments (if applicable).
• TMC's interim financial statements for the first quarter of 2022 (three months ended March 31, 2022) and the related MD&A will need to describe the Notes if the closing occurs prior to the filing deadline for those statements. Given the April 19, 2022 closing date and the 45-day filing deadline for Q1 interim filings, the Notes will need to be reflected in the Q1 interim filings.
• The Indenture contains reporting covenants that require TMC to furnish to the Trustee and to holders of the Notes annual reports within 90 days of fiscal year-end and quarterly reports within 45 days of each fiscal quarter-end. These Indenture reporting deadlines should be synchronized with TMC's Canadian filing obligations to ensure that TMC does not inadvertently breach either set of requirements.
TMC's auditors, Aldgate Thornton LLP (Francesca Hui, Engagement Partner), should be notified of the new debt instrument for inclusion in subsequent financial statement notes and for purposes of their audit planning and risk assessment procedures.
D. Insider Reporting and Trading Restrictions
The existence of material undisclosed information concerning the Notes offering raises issues under Canadian insider trading and insider reporting requirements.
Officers and directors of TMC who are aware of the planned offering (including, at a minimum, Magnus Thornberg, Lianne Prokopchuk, Deepak Rathore, Colleen Hébert, and Ingrid Solheim) are in possession of material information that has not been generally disclosed to the public. Under provincial securities legislation, including Part XXI of the Securities Act (Ontario), an insider of a reporting issuer who has knowledge of a material fact or material change that has not been generally disclosed is prohibited from trading in the securities of that issuer.
Recommendation. TMC should impose a trading blackout on all insiders (officers, directors, and any other persons who may be in possession of the relevant material information) from the commencement of the marketing period (March 14, 2022, the date of the final Offering Memorandum) until public disclosure of the offering terms (i.e., the issuance of the pricing press release). The blackout should be imposed and communicated in accordance with TMC's existing insider trading policy, and Deepak Rathore should coordinate the implementation and monitoring of the blackout.
We have raised this issue with Deepak Rathore and understand that TMC's insider trading policy already provides for trading blackouts in connection with significant corporate transactions. Pendleton Ross LLP has confirmed that the blackout procedures described above are consistent with Canadian securities law requirements.
VI. Cross-Border Regulatory Considerations
A. Canadian Dealer Registration
Under the Securities Act (Ontario) and corresponding legislation in other provinces, as well as National Instrument 31-103 — Registration Requirements, Exemptions and Ongoing Registrant Obligations ("NI 31-103"), any person or company that engages in the business of trading in securities in a province of Canada must be registered as a dealer (or must rely on an exemption from the registration requirement) in that province.
The Initial Purchasers — Kelvantis Capital Markets LLC, Prestige Barrington & Co., Inc., and Halcyon Securities Inc. — are FINRA-registered broker-dealers in the United States. None of the Initial Purchasers is registered as a dealer in any province or territory of Canada.
Because no offers or sales of the Notes are being made in Canada and the Initial Purchasers are not directing any offering efforts toward Canadian persons, no Canadian dealer registration is required. The Initial Purchasers' activities in connection with the offering — including the marketing, pricing, and sale of the Notes — are being conducted entirely outside Canada and are directed exclusively at U.S. qualified institutional buyers (under Rule 144A) and non-U.S. persons outside the United States and Canada (under Regulation S).
We note, however, that if any Initial Purchaser were to solicit or sell Notes to Canadian-resident investors, dealer registration in the relevant Canadian province(s) — or reliance on an exemption from dealer registration — would be required. The most relevant exemption in such circumstances would be the "international dealer" exemption under NI 31-103, §8.18, which permits a person or company registered as a dealer in a foreign jurisdiction to trade in certain debt securities with "permitted clients" in Canada without Canadian dealer registration, subject to specified conditions. We do not anticipate that this exemption will be needed, but we flag it for completeness.
Recommendation. We recommend that Kelvantis Capital Markets LLC (Julian Marchetti) provide written confirmation that no marketing materials were distributed to, and no investor meetings were held with, Canadian-resident investors, and that no offers or sales of the Notes were made to any person in Canada. This confirmation should be in the form of a compliance certificate or a confirming e-mail and should be obtained prior to closing and retained in the transaction file.
B. Investment Canada Act
The Investment Canada Act, R.S.C. 1985, c. 28 (1st Supp.) (the "ICA"), provides for the review of certain investments in Canadian businesses by non-Canadians. The ICA applies to the acquisition of control of a Canadian business (whether by direct or indirect means), and significant investments in Canadian businesses may be subject to net benefit review or national security review.
The issuance of the Notes does not trigger review under the ICA for the following reasons:
(a) No acquisition of control of a Canadian business is occurring. The offering is a debt issuance by TMC; no equity securities are being sold, and no change in the ownership or control of TMC or any of its subsidiaries results from the offering.
(b) The Notes are debt instruments. The holders of the Notes will be creditors of TMC, not equity owners. The acquisition of debt securities of a Canadian business does not, in and of itself, constitute an "investment" within the meaning of the ICA.
(c) While the Notes are secured by substantially all of the assets of the Canadian grantors (including mining claims, equipment, and other collateral), the enforcement of the security interest in the event of a default could potentially involve steps that would constitute an acquisition of control of a Canadian business for ICA purposes. However, any such enforcement would be a separate future event that would be analyzed under the ICA at that time, and the mere grant of a security interest does not trigger ICA review.
Recommendation. No ICA filing or notification is required in connection with the issuance of the Notes. The Offering Memorandum contains a risk factor noting that the enforcement of security interests over Canadian assets could potentially be subject to ICA review, which provides appropriate transparency to investors.
C. Competition Act (Canada)
The Competition Act, R.S.C. 1985, c. C-34, requires pre-merger notification to the Commissioner of Competition for certain mergers and acquisitions that exceed specified size thresholds. The Notes offering does not constitute a merger or acquisition triggering the pre-merger notification requirements under Part IX of the Competition Act. The transaction is a debt financing, not an acquisition of shares, assets, or control. Accordingly, no filing with the Competition Bureau is required.
D. CBCA Considerations
TMC is incorporated under the CBCA, and the issuance of the Notes and the entry into the Indenture, the Guarantees, and the Canadian General Security Agreement require proper corporate authorization under the CBCA.
Borrowing Powers. Section 189(1) of the CBCA provides that, unless the articles, by-laws, or a unanimous shareholder agreement otherwise provide, the directors of a corporation may, without authorization of the shareholders:
(a) borrow money upon the credit of the corporation;
(b) issue, reissue, sell, or pledge debt obligations of the corporation; and
(c) mortgage, hypothecate, pledge, or otherwise create a security interest in all or any property of the corporation, owned or subsequently acquired, to secure any obligation of the corporation.
We have reviewed the articles of incorporation and by-laws of TMC (copies of which were provided by Deepak Rathore) and have confirmed that TMC's articles do not contain any restrictions on the corporation's borrowing powers within the meaning of CBCA §44. Accordingly, the board of directors of TMC has the full authority under the CBCA to authorize the issuance of the Notes, the entry into the Indenture, and the grant of security interests under the Canadian General Security Agreement without shareholder approval.
Board Authorization. Board resolutions of the directors of TMC authorizing the offering of the Notes, the execution and delivery of the Indenture, the Guarantees, the Canadian General Security Agreement, and the other transaction documents were duly passed at a meeting of the board of directors held on February 3, 2022. Certified copies of these resolutions are to be attached to the Secretary's Certificate of Torchlight Mining Corp. dated as of the closing date (April 19, 2022), which will be delivered as a closing condition.
No Shareholder Approval Required. No shareholder approval is required under the CBCA for the issuance of debt securities. The CBCA provisions requiring shareholder approval (e.g., CBCA §173 for fundamental changes such as amendments to the articles, and CBCA §183(3) for sales of substantially all of the assets of the corporation outside the ordinary course of business) are not triggered by the issuance of the Notes.
Pendleton Ross LLP will confirm in its Canadian law opinion that TMC has the corporate power and authority under the CBCA to issue the Notes, to enter into the Indenture and the other transaction documents, and to perform its obligations thereunder.
E. Ontario Business Corporations Act Considerations — Subsidiary Guarantors
Wolverine Lake Mining Ltd. and Torchlight Milling & Processing Inc. are corporations incorporated under the Business Corporations Act (Ontario), R.S.O. 1990, c. B.16 (the "OBCA"). Each is a wholly owned subsidiary of TMC and will guarantee the Notes on a senior secured basis and grant security interests over substantially all of its assets under the Canadian General Security Agreement.
Guarantor Authority. Section 184(1) of the OBCA provides that, unless the articles or by-laws of an Ontario corporation otherwise restrict, the directors may by resolution authorize the corporation to guarantee an obligation of any person. We have reviewed the articles and by-laws of each of WLML and TMPI and have confirmed that neither entity's constating documents contain restrictions on the power to guarantee obligations.
Corporate Benefit / Financial Assistance Analysis. The Guarantees and the Canadian General Security Agreement may constitute "financial assistance" within the meaning of the OBCA. However, unlike certain other jurisdictions (such as the United Kingdom, where financial assistance by a company for the purpose of the acquisition of its own shares is subject to significant statutory restrictions), the OBCA does not prohibit financial assistance by a corporation. Section 20 of the OBCA permits a corporation to provide financial assistance to any person without restriction and without any solvency test or "whitewash" procedure. This is a significant advantage of Ontario incorporation for the subsidiary guarantors and eliminates what would otherwise be a potential concern in the context of upstream and cross-stream guarantees.
Notwithstanding the absence of a statutory prohibition, we note that the Guarantees should be entered into for a proper corporate purpose and that the directors of each subsidiary guarantor should satisfy themselves that the provision of the Guarantee and the grant of security interests are in the best interests of the relevant subsidiary. The board resolutions of WLML and TMPI specifically address these matters and include recitals confirming that each entity derives material commercial benefit from the financial strength and creditworthiness of the TMC group as a whole, and that the Guarantees are being provided in support of the group's financing needs.
Board Authorization. Board resolutions of the directors of WLML and TMPI authorizing the execution and delivery of the Guarantees and the Canadian General Security Agreement were duly passed at meetings held on February 3, 2022. Certified copies of these resolutions will be attached to the respective Secretary's Certificates of WLML and TMPI to be delivered at closing.
Pendleton Ross LLP will address the corporate power and authority of WLML and TMPI, the enforceability of the Guarantees and the Canadian General Security Agreement, and the absence of financial assistance concerns in its Canadian law opinion.
VII. Collateral and Security Filing Considerations Under Canadian Law
A. Canadian General Security Agreement
The Canadian General Security Agreement (the "Canadian GSA") dated as of April 19, 2022, among Torchlight Mining Corp., Wolverine Lake Mining Ltd., and Torchlight Milling & Processing Inc. (collectively, the "Canadian Grantors") and Northern Dominion Trust Company, as Collateral Agent, grants a first-priority lien on substantially all of the tangible and intangible assets of the Canadian Grantors in favor of the Collateral Agent for the benefit of the holders of the Notes.
The collateral subject to the Canadian GSA includes, without limitation:
• all mining rights, mineral claims, and mineral leases held by the Canadian Grantors, including Ontario Mining Claim Nos. WL-4492-01 through WL-4492-47 (a contiguous block of 47 mining claims covering the Wolverine Lake property);
• all surface rights at the Wolverine Lake property, comprising approximately 12,400 hectares of land located approximately 85 kilometers northeast of Thunder Bay, Ontario;
• all equipment, machinery, vehicles, tools, and other tangible personal property owned by the Canadian Grantors and used in connection with their mining and processing operations;
• all inventory, including raw materials, work-in-progress, finished goods (copper-nickel concentrate), and supplies;
• all accounts receivable, contract rights, and general intangibles;
• all intellectual property, including trademarks, patents, copyrights, trade secrets, and proprietary technology;
• all equity interests in subsidiaries held by the Canadian Grantors; and