CALDERWOOD & HARKNESS LLP 450 Park Avenue New York, New York 10022 Telephone: (212) 555-7800 Facsimile: (212) 555-7801
PRIVILEGED AND CONFIDENTIAL ATTORNEY WORK PRODUCT
MEMORANDUM
To: Vivienne St. Claire, Responsible Partner, Capital Markets Robert Adeyemi, Billing Partner, Capital Markets
From: Audrey Zhou, Lead Associate, Capital Markets Brendan Walsh, Working Associate, Capital Markets
Date: March 18, 2022
Re: Due Diligence Memorandum — Environmental & Regulatory Review — Torchlight Mining Corp. $300,000,000 8.750% Senior Secured Notes due 2029
Matter No.: 1039-00002
Confidentiality Notice: This memorandum is prepared for internal use by Calderwood & Harkness LLP in connection with its representation of Torchlight Mining Corp. as issuer's U.S. counsel. This memorandum is protected by the attorney-client privilege and the work product doctrine. It is intended solely for the use of the attorneys and personnel of Calderwood & Harkness LLP identified above and should not be disclosed to any third party without the prior written consent of the undersigned. Any inadvertent disclosure does not constitute a waiver of any applicable privilege or protection.
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I. Executive Summary
This memorandum summarizes the results of our environmental and regulatory due diligence review conducted in connection with the proposed issuance by Torchlight Mining Corp. ("Torchlight" or the "Company") of $300,000,000 aggregate principal amount of 8.750% Senior Secured Notes due 2029 (the "Notes") pursuant to a Rule 144A / Regulation S offering (the "Offering"). The purpose of this memorandum is to provide the deal team with a comprehensive assessment of the environmental permitting status, compliance history, and regulatory approval posture of Torchlight and its wholly owned subsidiaries, Wolverine Lake Mining Ltd. ("WLML") and Torchlight Milling & Processing Inc. ("TMPI"), with particular attention to the environmental and regulatory considerations relevant to the Offering, the disclosure in the Final Offering Memorandum, and the collateral securing the Notes.
Principal Asset. The principal asset of Torchlight and its subsidiaries is the Wolverine Lake Nickel-Copper Mine (the "Wolverine Lake Mine" or the "Mine"), located approximately 85 kilometers northeast of Thunder Bay, Ontario, Canada. The Mine property encompasses approximately 12,400 hectares and is held pursuant to Ontario Mining Claim Nos. WL-4492-01 through WL-4492-47, together with associated surface rights. WLML operates the underground mine, while TMPI operates the concentrator and processing facilities located on the mine site.
Operating Entities. WLML and TMPI are both corporations organized under the laws of the Province of Ontario. Both entities are wholly owned subsidiaries of Torchlight Mining Corp., which is incorporated under the Canada Business Corporations Act ("CBCA") and is headquartered at 2200 – 400 Burrard Street, Vancouver, British Columbia V6C 3A6, with its registered office at 1600 – 925 West Georgia Street, Vancouver, British Columbia V6C 3L2.
Phase II Expansion. In addition to the existing Phase I operations, Torchlight is pursuing a significant expansion of the Wolverine Lake Mine (the "Phase II Expansion" or "Phase II"). The Phase II Expansion involves the construction of a new decline ramp and ventilation raise to access the Wolverine Deep zone, a deeper and geologically distinct mineralized zone situated below the current mining horizon. The estimated capital cost of the Phase II Expansion is approximately CAD $215 million (approximately USD $169 million at a USD/CAD exchange rate of 0.7875), with construction anticipated to commence in Q2 2022 and to be substantially completed by Q4 2024. Upon completion, the Phase II Expansion is expected to increase annual production from approximately 18,000 tonnes of nickel-in-concentrate and approximately 6,100 tonnes of copper-in-concentrate under the current Phase I mine plan to approximately 28,500 tonnes of nickel-in-concentrate and approximately 9,600 tonnes of copper-in-concentrate, representing a meaningful increase in the Company's production capacity and revenue base. The proceeds of the Notes are intended, in part, to fund a significant portion of the Phase II Expansion capital expenditure program.
Key Finding. Based on our review of the materials described in Section II below, our discussions with management and with Canadian counsel, and our review of the independent engineer's report, we have not identified any material environmental liabilities or unresolved regulatory deficiencies that would prevent issuance of the Notes or closing of the Offering. However, one regulatory approval related to the Phase II Expansion — specifically, the amended Closure Plan approval under the Mining Act (Ontario) — was pending at the time of the original expected closing date, causing an extension of the closing date from April 5, 2022 to April 19, 2022. As discussed in detail in Section VI below, this approval was subsequently received prior to the actual closing date.
Sources Reviewed. This memorandum is based on the following principal sources of information:
• Management interviews conducted during the due diligence sessions held February 14–16, 2022, at the offices of Calderwood & Harkness LLP in New York, with participation by senior management of Torchlight, WLML, and TMPI;
• The independent engineer's report prepared by Cascade Technical Advisors Inc. (Dr. Elaine Whitaker, P.Eng., lead author), delivered February 28, 2022 (the "Independent Engineer's Report");
• Environmental compliance files and the permit register provided by Deepak Rathore, General Counsel & Corporate Secretary of Torchlight, and by Stavros Katsaros, General Manager, Mine Operations, WLML;
• Input and guidance from Pendleton Ross LLP (Marie-Claire Bouchard, partner), acting as Canadian counsel to Torchlight, regarding the interpretation and application of Canadian federal and Ontario provincial regulatory requirements; and
• The additional materials and documents described in Section II.B below.
II. Scope and Methodology
A. Scope of Review
The scope of this environmental and regulatory due diligence review encompasses the following subject areas:
1. Environmental Permits, Licenses, and Approvals. Review of all material environmental permits, licenses, and regulatory approvals applicable to both Phase I (existing operations) and Phase II (expansion) at the Wolverine Lake Mine, including permits issued by provincial and federal authorities in Canada.
2. Compliance History. Assessment of the compliance history of Torchlight, WLML, and TMPI with applicable provincial and federal environmental legislation over the review period, with a focus on the past five years (2017–2022).
3. Regulatory Approvals for Phase II. Identification and status assessment of all regulatory approvals required for the Phase II Expansion, including any approvals that may constitute conditions precedent to the closing of the Offering or to the commencement of Phase II construction activities.
4. Environmental Liabilities, Remediation Obligations, and Closure/Reclamation Provisions. Evaluation of any outstanding or contingent environmental liabilities, remediation obligations, or cleanup orders, as well as the Company's obligations under the approved Closure Plan and associated financial assurance requirements.
5. Environmental Risk Factors for Offering Memorandum Disclosure. Assessment of environmental and regulatory risk factors that should be disclosed in the risk factors section of the Final Offering Memorandum, and review of the adequacy of existing disclosure.
6. Security Interest Considerations. Review of the interaction between environmental liabilities, regulatory liens, and the security interests granted in the mining claims, surface rights, and other assets of WLML and TMPI under the Canadian General Security Agreement dated April 19, 2022, with Northern Dominion Trust Company as Collateral Agent, in connection with the collateral securing the Notes.
B. Materials Reviewed
In conducting this review, we examined the following materials, among others:
• Complete permit and license register maintained by WLML and TMPI, as provided by Stavros Katsaros and Deepak Rathore;
• Environmental Compliance Approval ("ECA") records issued by the Ontario Ministry of the Environment, Conservation and Parks (the "MECP"), including ECAs for air emissions, noise, and waste management;
• The Closure Plan filed by WLML under Part VII of the Mining Act (Ontario), together with all amendments and the pending amendment application for the Phase II Expansion;
• Environmental Assessment Act (Ontario) screening documentation applicable to the Phase II Expansion;
• Federal Impact Assessment Act (Canada) project listing and screening determinations related to the Phase II Expansion, including the screening determination letter from the Impact Assessment Agency of Canada;
• Fisheries Act (Canada) authorization records related to Phase I operations and correspondence regarding Phase II;
• Species at Risk Act (Canada) correspondence, desktop assessments, field survey reports, and any permit applications;
• Water management plans, effluent monitoring reports, and quarterly compliance data for the period 2019–2021;
• The Independent Engineer's Report prepared by Cascade Technical Advisors Inc. (Dr. Elaine Whitaker, P.Eng.), delivered February 28, 2022, which contains a dedicated section on environmental and regulatory risk assessment;
• NI 43-101 Technical Report containing mineral resource estimates for the Wolverine Lake deposit, reporting Measured & Indicated resources of 48.2 million tonnes at 1.12% Ni and 0.38% Cu, and Inferred resources of 11.7 million tonnes at 0.94% Ni and 0.31% Cu;
• Correspondence between Torchlight, WLML, TMPI, and the relevant regulatory authorities, including the MECP, the Ministry of Northern Development, Mines, Natural Resources and Forestry (the "MNDMNRF"), and the Impact Assessment Agency of Canada;
• Torchlight's annual report for fiscal year 2021, reflecting revenue of CAD $612.4 million and Adjusted EBITDA of CAD $189.7 million;
• Preliminary and Final Offering Memorandum drafts circulated in connection with the Offering; and
• Discussions with Pendleton Ross LLP (Marie-Claire Bouchard) regarding the Canadian regulatory framework and the status of pending regulatory applications.
C. Methodology
Our due diligence methodology consisted of the following components:
Document Review. We conducted a comprehensive review of the documents and materials identified in Section II.B above. Where questions arose regarding the interpretation of permit conditions, compliance data, or regulatory correspondence, we consulted with Pendleton Ross LLP for guidance on the applicable Canadian legal standards and regulatory practice.
Management Interviews. During the due diligence sessions held February 14–16, 2022, we conducted structured interviews with senior management representatives of Torchlight, WLML, and TMPI, including Deepak Rathore (General Counsel & Corporate Secretary), Stavros Katsaros (General Manager, Mine Operations, WLML), and other operational and environmental personnel. These interviews were designed to elicit information regarding the current status of permits and approvals, any pending or threatened enforcement actions, and the Company's environmental management practices and compliance systems.
Cross-Referencing with Independent Engineer's Report. We cross-referenced our findings with the relevant environmental and regulatory sections of the Independent Engineer's Report, which was prepared by Cascade Technical Advisors Inc. under the direction of Dr. Elaine Whitaker, P.Eng. The Independent Engineer's Report provided an independent technical assessment of the environmental and regulatory posture of the Mine and served as a key corroborative source.
Consultation with Canadian Counsel. We coordinated with Pendleton Ross LLP (Marie-Claire Bouchard) on matters of Canadian law interpretation, including the requirements for Closure Plan amendments under the Mining Act (Ontario), the scope of environmental compliance approvals under the Environmental Protection Act (Ontario), and the screening determination process under the federal Impact Assessment Act.
Site Visit. We note that a site visit to the Wolverine Lake Mine, located in northern Ontario, had not been completed at the time of preparation of this memorandum. A site visit is planned to be scheduled separately and is subject to logistical coordination with mine operations. Pursuant to the engagement letter between Calderwood & Harkness LLP and Torchlight Mining Corp., travel costs associated with the mine site visit are excluded from the C&H expense cap and will be billed separately.
III. Applicable Environmental and Regulatory Framework
This section provides an overview of the principal environmental and regulatory legislation applicable to the operations of WLML and TMPI at the Wolverine Lake Mine. The regulatory framework is multi-layered, involving both provincial (Ontario) and federal (Canadian) legislation. Our review has been conducted with the assistance of Pendleton Ross LLP with respect to the interpretation and application of Canadian law.
A. Provincial Legislation — Ontario
1. Mining Act (Ontario)
The Mining Act, R.S.O. 1990, c. M.14, as amended, is the primary provincial statute governing mining activity in Ontario. It establishes the legal framework for the acquisition and maintenance of mining claims, the grant of surface rights, the issuance of exploration permits and mine production licenses, and the regulation of mine development and closure.
The Wolverine Lake Mine is held under Ontario Mining Claim Nos. WL-4492-01 through WL-4492-47, all of which are registered to WLML and are in good standing. The Mining Act requires that holders of mining claims perform and report annual assessment work in order to maintain the claims in good standing, and our review has confirmed that all assessment work obligations have been satisfied and accepted by the MNDMNRF.
Of particular relevance to this review is Part VII of the Mining Act, which requires the filing and maintenance of a Closure Plan for all mine sites in Ontario. The Closure Plan must be approved by the Director of Mine Rehabilitation under the MNDMNRF and must describe the measures to be taken for the rehabilitation of the mine site upon closure, including the management of tailings, the restoration of disturbed land, and the long-term treatment of mine water. The Closure Plan must be accompanied by financial assurance, which may take the form of a letter of credit, a reclamation trust fund, or other instruments acceptable to the Director.
Any material change to operations — including significant expansion activities such as the Phase II Expansion (involving a new decline ramp, ventilation raise, and access to the Wolverine Deep zone) — requires an amendment to the Closure Plan. The amendment must be approved by the Director before the material change may be implemented. The requirement to obtain an amended Closure Plan for the Phase II Expansion is the central regulatory issue discussed in this memorandum.
2. Environmental Protection Act (Ontario)
The Environmental Protection Act, R.S.O. 1990, c. E.19, as amended (the "EPA"), is the principal provincial statute governing the protection of the natural environment in Ontario. Under the EPA, industrial operations, including mining and mineral processing, are required to obtain Environmental Compliance Approvals ("ECAs") for activities that may result in the discharge of contaminants into the natural environment. ECAs are issued by the MECP and are the primary regulatory instrument for managing air emissions, noise, and waste from industrial sources.
TMPI, as the operator of the concentrator and processing facilities at the Wolverine Lake Mine, holds ECAs for air emissions (covering particulate matter, sulphur dioxide (SO₂), and other emissions associated with the concentration and processing of nickel-copper ore), as well as ECAs for noise and industrial waste management. WLML also holds ECAs related to waste rock management and the operation of the tailings storage facility.
3. Ontario Water Resources Act
The Ontario Water Resources Act, R.S.O. 1990, c. O.40, as amended (the "OWRA"), governs the taking of water and the discharge of effluent in Ontario. Under the OWRA, a Permit to Take Water ("PTTW") is required for any taking of water in excess of 50,000 litres per day, which is applicable to both the mine dewatering operations at the Wolverine Lake Mine and the process water requirements of the TMPI concentrator. PTTWs specify the authorized volumes of water that may be extracted, the sources from which water may be drawn, and the conditions under which the taking must occur.
Additionally, the discharge of treated mine water and process water effluent is regulated under the OWRA, in conjunction with applicable ECA conditions and the federal Metal and Diamond Mining Effluent Regulations.
4. Environmental Assessment Act (Ontario)
The Environmental Assessment Act, R.S.O. 1990, c. E.18, as amended, requires environmental assessment of certain public and private sector undertakings in Ontario. Mining projects are subject to a screening-level assessment process under Ontario Regulation 101/07, which establishes a streamlined review process for undertakings at existing mine sites. The Phase II Expansion was assessed under this screening process, and the results of that screening are discussed in Section V below.
5. Endangered Species Act (Ontario)
The Endangered Species Act, 2007, S.O. 2007, c. 6 (the "ESA"), protects species at risk and their habitats in Ontario. Under the ESA, it is prohibited to kill, harm, harass, capture, or take a living member of a species listed on the Species at Risk in Ontario List, or to damage or destroy the habitat of such species, except under an authorization from the MECP. Where activities may affect species at risk or their habitat, an Overall Benefit Permit may be required, obligating the proponent to demonstrate that the activity will result in an overall benefit to the species.
Our review included a consideration of the applicability of the ESA to the Wolverine Lake Mine property, including the Phase II Expansion footprint, and is discussed in Section V.F below.
B. Federal Legislation — Canada
1. Impact Assessment Act (Canada)
The Impact Assessment Act, S.C. 2019, c. 28, s. 1 (the "IAA"), replaced the former Canadian Environmental Assessment Act, 2012 and establishes the federal process for assessing the environmental, health, social, and economic effects of designated projects. Physical activities that are described in the Physical Activities Regulations, SOR/2019-285, may trigger a requirement for a federal impact assessment, which involves a detailed review process administered by the Impact Assessment Agency of Canada.
A critical question for the Phase II Expansion was whether the construction of the new decline ramp, ventilation raise, and the associated increase in production capacity would constitute a "designated project" under the Physical Activities Regulations, thereby triggering a federal impact assessment. This question is addressed in detail in Section V.D below.
2. Fisheries Act (Canada)
The Fisheries Act, R.S.C. 1985, c. F-14, as amended, prohibits the harmful alteration, disruption, or destruction ("HADD") of fish habitat and the deposit of deleterious substances in waters frequented by fish, except as authorized. An authorization under the Fisheries Act is required for any work, undertaking, or activity that results in HADD of fish habitat. This statute is of particular relevance to the Wolverine Lake Mine given the proximity of the mine site to the Wolverine Lake watershed and associated watercourses. The Metal and Diamond Mining Effluent Regulations ("MDMER"), SOR/2002-222, made under the Fisheries Act, establish effluent quality standards for the metal mining industry, including limits on total suspended solids, arsenic, copper, cyanide, lead, nickel, zinc, and radium-226, as well as requirements for environmental effects monitoring.
3. Species at Risk Act (Canada)
The Species at Risk Act, S.C. 2002, c. 29 ("SARA"), provides additional protections for species listed on the federal List of Wildlife Species at Risk, particularly on federal lands and in relation to aquatic species and migratory birds. SARA imposes prohibitions against killing, harming, or harassing listed species and against the destruction of their critical habitat. Where projects may affect federally listed species or their habitat, compliance with SARA must be assessed in coordination with any provincial species at risk legislation.
4. Canadian Environmental Protection Act, 1999
The Canadian Environmental Protection Act, 1999, S.C. 1999, c. 33 ("CEPA"), establishes a framework for the federal management of toxic substances and pollutant releases. Under CEPA, facilities meeting certain reporting thresholds are required to report annual releases, disposals, and transfers of specified substances to the National Pollutant Release Inventory ("NPRI"). Both WLML and TMPI are subject to NPRI reporting obligations and have filed annual reports as required. No deficiencies in NPRI reporting have been identified.
C. Coordination with Board Chair Ingrid Solheim
We note, for the sake of completeness and in the interest of full disclosure to the deal team, that Torchlight's Board Chair, Ingrid Solheim, is a former Deputy Minister of the Ontario Ministry of Northern Development, Mines, Natural Resources and Forestry. Ms. Solheim served in that capacity prior to joining the Torchlight Board and is no longer affiliated with the MNDMNRF in any official capacity. We have not identified any conflicts of interest arising from this prior affiliation, and Pendleton Ross LLP has confirmed that Ms. Solheim's involvement with the MNDMNRF predates the current regulatory matters at issue. This information is noted solely for the purpose of documenting the known relationships between Torchlight's governance and the relevant regulatory bodies.
IV. Environmental Permits and Approvals — Phase I (Existing Operations)
This section summarizes the status of environmental permits and approvals applicable to the existing Phase I operations at the Wolverine Lake Mine, including both underground mining operations conducted by WLML and concentrator and processing operations conducted by TMPI.
A. Mining Claims and Surface Rights
Torchlight's principal operating asset at the Wolverine Lake Mine is held through Ontario Mining Claim Nos. WL-4492-01 through WL-4492-47, a contiguous block of 47 mining claims registered to Wolverine Lake Mining Ltd. in the Ontario Mining Claim registry administered by the MNDMNRF. We have reviewed the claim register extract (included as Appendix G to this memorandum) and have confirmed the following:
• All 47 mining claims are in good standing as of the date of this memorandum;
• Annual assessment work requirements have been filed and accepted by the MNDMNRF for each claim;
• Surface rights for the mine site are registered to WLML;
• All mining claims and surface rights form part of the collateral package under the Canadian General Security Agreement dated April 19, 2022, entered into between WLML, TMPI (as grantors), and Northern Dominion Trust Company (as Collateral Agent for the benefit of the holders of the Notes); and
• No competing claims, disputes, challenges, or adverse interests to the mining rights or surface rights have been identified in the registry or in our discussions with management and Canadian counsel.
We note that the due diligence team has separately prepared a detailed analysis of the mining claim status and surface rights in the Due Diligence Memorandum — Material Contracts & Mining Rights, to which this memorandum should be read in conjunction.
B. Closure Plan
WLML filed a Closure Plan for the Wolverine Lake Mine with the MNDMNRF pursuant to Part VII of the Mining Act (Ontario). The Closure Plan was approved by the Director of Mine Rehabilitation and remains in effect as of the date of this memorandum. The Closure Plan addresses, among other matters:
• Progressive rehabilitation of disturbed surface areas, including waste rock storage areas and access roads;
• Closure of the tailings management area, including design of a final cover system and long-term geotechnical and geochemical monitoring;
• Water treatment during the post-closure period, including the construction and maintenance of passive water treatment systems;
• Decommissioning and removal of mine infrastructure; and
• Long-term monitoring and maintenance obligations.
Financial assurance has been posted by WLML in connection with the approved Closure Plan, in the form of a letter of credit and contributions to a reclamation trust fund. The amounts of the letter of credit and trust fund balance were confirmed during management interviews conducted February 14–16, 2022, and are consistent with the requirements established by the Director. No deficiencies in financial assurance have been identified, and no orders or directions have been issued by the MNDMNRF in connection with the Closure Plan or its associated financial assurance.
C. Environmental Compliance Approvals (ECAs)
The following Environmental Compliance Approvals have been issued by the MECP and are currently in effect for Phase I operations:
Air Emissions ECA — TMPI Concentrator. This ECA authorizes the emission of particulate matter, sulphur dioxide (SO₂), nitrogen oxides (NOₓ), and other contaminants associated with the milling, concentration, and processing of nickel-copper ore at the TMPI concentrator. Annual compliance reports have been filed with the MECP for each year of the review period (2019, 2020, and 2021). Our review of these reports indicates that no material exceedances of the emission limits specified in the ECA have been recorded during the review period. Minor operational variations within the prescribed compliance margins were noted but do not constitute non-compliance.
Noise ECA — Mine and Concentrator. This ECA establishes noise emission limits for the combined mine and concentrator operations, including limits at the property boundary and at the nearest noise-sensitive receptor locations. Noise monitoring stations are installed at the property boundary and are subject to periodic reporting. Compliance with the noise limits has been confirmed for the review period.
Waste Management ECA — Mine Rock, Tailings, and Hazardous Waste. This ECA governs the management and disposal of mine rock, tailings, and hazardous waste generated at the Wolverine Lake Mine. The tailings storage facility ("TSF") is operating within its permitted design capacity and regulatory limits. Hazardous waste, including lubricants, solvents, and other materials associated with mine operations, is managed through licensed third-party waste haulers and disposal facilities. No deficiencies in waste management have been identified.
D. Water Permits
Permit to Take Water (PTTW) — Mine Dewatering. WLML holds a PTTW issued by the MECP authorizing the extraction of groundwater for mine dewatering purposes. Quarterly monitoring reports for the period 2019–2021 confirm that extraction volumes have remained within the permitted limits. No exceedances of the permitted taking volumes have been recorded.
Permit to Take Water (PTTW) — Concentrator Process Water. TMPI holds a separate PTTW authorizing the taking of surface water and/or groundwater for use as process water in the concentrator operations. This PTTW is in good standing and has been operated in compliance with its terms and conditions.
Effluent Discharge Approval. Treated mine water and process water effluent is discharged in accordance with the conditions of the applicable PTTWs and ECAs, as well as in compliance with the federal Metal and Diamond Mining Effluent Regulations (MDMER). Effluent monitoring data for the period 2019–2021 was reviewed and is summarized in Appendix C to this memorandum. The data confirms that effluent quality has consistently met the applicable standards for total suspended solids, arsenic, copper, cyanide, lead, nickel, zinc, and radium-226. No material non-compliance events have been identified.
E. Federal Permits (Phase I)
Fisheries Act Authorization. A Fisheries Act authorization was obtained by WLML in connection with the original development of the Wolverine Lake Mine, specifically related to the mine development footprint affecting a tributary of Wolverine Creek. The authorization imposes conditions relating to the mitigation of impacts to fish habitat, including offsetting measures and monitoring obligations. Our review indicates that WLML is in ongoing compliance with the conditions of the authorization.
NPRI Reporting. Both WLML and TMPI have filed annual NPRI reports as required under CEPA. Our review of the available records indicates that all filings have been made on time and that no deficiencies or discrepancies have been identified by Environment and Climate Change Canada.
F. Compliance History Summary (Phase I)
Based on our review of the compliance files, correspondence with regulatory authorities, and management representations, the compliance history of WLML and TMPI for Phase I operations at the Wolverine Lake Mine may be summarized as follows:
• No material environmental enforcement actions, orders, or penalties have been issued against WLML, TMPI, or Torchlight in connection with the Wolverine Lake Mine during the past five years (2017–2022). There are no outstanding administrative penalties, fines, or prosecutions under any provincial or federal environmental statute.
• Two minor provincial officer's reports were issued during the review period: (i) a report regarding late filing of quarterly effluent monitoring data for Q3 2020, and (ii) a report regarding late filing of quarterly monitoring data for Q1 2021. In both instances, the late filings were administrative in nature, were promptly remedied upon notification, and were resolved without the imposition of any penalty, fine, or enforcement action. These matters are, in our view, immaterial.
• No outstanding remediation orders or directions have been issued by any regulatory authority in connection with the Wolverine Lake Mine. There are no pending or threatened enforcement actions known to management or reflected in the compliance files.
• No listings on any contaminated sites registry. The Wolverine Lake Mine is not listed on any federal or provincial contaminated sites registry, and there is no Superfund-equivalent designation or analogous listing applicable to the site.
V. Environmental Permits and Approvals — Phase II Expansion
A. Overview of Phase II Regulatory Requirements
The Phase II Expansion involves a number of activities that trigger additional regulatory review and approval requirements beyond those applicable to the existing Phase I operations. Specifically, the Phase II Expansion encompasses:
• Construction of a new decline ramp providing access from the existing underground workings to the Wolverine Deep zone;
• Construction of a ventilation raise to service the expanded underground workings;
• Development of expanded underground workings in the Wolverine Deep zone;
• Potential staged expansion of the tailings storage facility to accommodate increased tailings volumes resulting from higher concentrator throughput; and
• Increased throughput at the TMPI concentrator, with associated increases in air emissions, water usage, and waste generation.
The principal regulatory approvals required for the Phase II Expansion include: (i) an amendment to the existing Closure Plan under the Mining Act (Ontario); (ii) amended or new ECAs for increased air emissions and water usage; (iii) an amended PTTW for increased mine dewatering; (iv) a federal impact assessment screening determination under the Impact Assessment Act; (v) assessment of whether an amendment to the existing Fisheries Act authorization or a new authorization is required; and (vi) a review under the Species at Risk Act (Ontario and federal). The status of each of these approvals is discussed below.
B. Amended Closure Plan — Mining Act (Ontario)
The most significant regulatory item for the Phase II Expansion — and the item that directly affected the closing timeline for the Offering — is the amendment to the existing Closure Plan filed by WLML under Part VII of the Mining Act (Ontario).
WLML submitted an application to the MNDMNRF for an amendment to the approved Closure Plan to reflect the Phase II Expansion. The amendment application addresses the following matters:
• The addition of the new decline ramp and ventilation raise to the mine plan;
• The extension of underground mine workings into the Wolverine Deep zone;
• Updated reclamation and closure cost estimates to reflect the expanded mine footprint;
• Revised progressive rehabilitation schedules; and
• Updated financial assurance amounts commensurate with the expanded mine plan.
As of the date of this memorandum (March 18, 2022), the amended Closure Plan application was under review by the Director of Mine Rehabilitation at the MNDMNRF. Approval was expected but had not yet been granted. This pending approval was the primary cause of the extension of the closing date from the original expected date of April 5, 2022 to the actual closing date of April 19, 2022, as discussed in detail in Section VI below.
We consulted with Pendleton Ross LLP (Marie-Claire Bouchard) regarding the status of the Closure Plan amendment. Ms. Bouchard confirmed the following:
• The Closure Plan amendment process is a standard regulatory procedure for material changes to mining operations under the Mining Act (Ontario), and the submission and review process is well-established;
• The MNDMNRF had not indicated any objections to the proposed amendment or raised any substantive concerns regarding the technical adequacy of the amended Closure Plan;
• Based on her communications with the MNDMNRF, Ms. Bouchard expected that approval of the amended Closure Plan would be received prior to the extended closing date of April 19, 2022; and
• Upon approval, WLML would be required to post updated financial assurance amounts (in the form of an increase to the existing letter of credit and/or additional contributions to the reclamation trust fund) within the statutory timeframe prescribed by the Director.
Update: The amended Closure Plan approval was received from the MNDMNRF prior to the actual closing date of April 19, 2022, satisfying this regulatory condition.
C. Environmental Compliance Approvals — Amendments
In connection with the Phase II Expansion, the following ECA amendment applications have been submitted:
Amended Air Emissions ECA. TMPI submitted an application to the MECP for an amendment to its existing air emissions ECA to reflect the increased concentrator throughput anticipated under Phase II. The increased throughput will result in higher volumes of particulate matter, SO₂, and other emissions, and the amended ECA is required to authorize these increased levels within the applicable regulatory limits.
Amended PTTW for Increased Mine Dewatering. WLML submitted an application to the MECP for an amendment to its existing PTTW to authorize increased mine dewatering volumes associated with the deeper workings in the Wolverine Deep zone. Access to the Wolverine Deep zone is expected to intersect additional groundwater inflows, requiring an increase in the authorized dewatering rate.
Both applications were pending as of the date of this memorandum. We are advised by Pendleton Ross LLP that the MECP is expected to process these applications within standard review timelines and that there is no indication of any objection or issue that would result in a denial or materially delay the approval process.
Importantly, the amended ECAs and PTTW are not conditions precedent to the closing of the Offering. The production increases associated with Phase II will ramp up gradually over the construction period (Q2 2022 – Q4 2024), and the existing permits are adequate to cover current operational levels throughout the construction period. The amended permits will be required prior to the commencement of production at Phase II levels, which is not expected until Q4 2024 at the earliest.
D. Federal Impact Assessment Screening
The Phase II Expansion was reviewed by Torchlight and its advisors against the Physical Activities Regulations under the Impact Assessment Act to determine whether the expansion constitutes a "designated project" that would trigger a requirement for a full federal impact assessment. A federal impact assessment, if required, could involve a lengthy and resource-intensive review process, with potential delays to the Phase II construction timeline.
The Impact Assessment Agency of Canada reviewed the Phase II Expansion and issued a screening determination letter (a copy of which is included as Appendix D to this memorandum). The Agency determined that the Phase II Expansion does not constitute a "designated project" requiring a federal impact assessment. The Agency's determination was based on the following factors:
• The Phase II Expansion occurs within the existing mine footprint and does not involve the construction of a new mine;
• The expansion does not trigger any size or capacity threshold specified in the Physical Activities Regulations for metal mines; and
• The expansion does not involve activities in a new geographic location that would engage additional environmental concerns.
This determination is consistent with our understanding of the applicable regulatory framework, as confirmed by Pendleton Ross LLP, and significantly reduces the regulatory risk associated with the Phase II Expansion at the federal level.
E. Fisheries Act Considerations
We reviewed whether the expanded mine dewatering operations and the potential expansion of the TSF in connection with Phase II would require an amendment to the existing Fisheries Act authorization or a new authorization from Fisheries and Oceans Canada.
The Independent Engineer's Report prepared by Cascade Technical Advisors Inc. (Dr. Elaine Whitaker, P.Eng.) addresses this issue directly and confirms that the Phase II mine plan has been designed to avoid additional HADD to fish habitat. Specifically, the report notes that:
• The expanded dewatering discharge will be routed through the existing water management infrastructure, with minor modifications to increase treatment capacity;
• The mine water treatment system, including settling ponds and polishing treatment, is adequate to handle the increased dewatering volumes while maintaining compliance with MDMER effluent quality standards;
• Any potential TSF expansion has been designed to avoid encroachment on watercourses or fish-bearing waters; and
• The Phase II mine plan incorporates mitigation measures to prevent sedimentation and contaminant release to the Wolverine Lake watershed.
Torchlight has engaged in precautionary consultations with Fisheries and Oceans Canada regarding the Phase II Expansion. Based on the information available, no new Fisheries Act authorization is expected to be required, although this determination is ultimately at the discretion of the federal regulator. We have not received any indication from Fisheries and Oceans Canada that an authorization will be required.
F. Species at Risk Review
A desktop assessment and field surveys were conducted as part of the Phase II planning process to evaluate whether any federally or provincially listed species at risk are present within the Phase II development footprint. The results of these assessments were reviewed by Cascade Technical Advisors Inc. and are reflected in the Independent Engineer's Report.
The assessments confirmed that no federally or provincially listed species at risk have been identified within the Phase II development footprint that would require additional permitting or impose operational constraints on the Phase II Expansion. The mine site is located in the boreal shield ecozone and has been subject to ongoing environmental monitoring throughout the Phase I operations. While certain species of conservation concern may be present in the broader 12,400-hectare property area, no critical habitat or sensitive areas have been identified in the vicinity of the proposed Phase II infrastructure.
Notwithstanding these findings, Torchlight has committed to ongoing monitoring of species at risk as part of the mine environmental management plan. This monitoring program includes periodic field surveys, reporting to the MECP and Environment and Climate Change Canada, and adaptive management measures if species at risk are identified in the future.
G. Independent Engineer's Confirmation
The Independent Engineer's Report prepared by Cascade Technical Advisors Inc. (Dr. Elaine Whitaker, P.Eng.), delivered February 28, 2022, includes a dedicated section on environmental and regulatory risk assessment for the Phase II Expansion. Relevant excerpts from this section are included as Appendix E to this memorandum.
The Independent Engineer's Report confirms the following:
• All material environmental permits for Phase I operations are in good standing, with no material compliance deficiencies identified;
• Phase II permitting is proceeding on expected timelines, with no identified red flags or issues that would suggest a risk of denial or material delay;
• The pending Closure Plan amendment under the Mining Act (Ontario) was identified as the only outstanding material regulatory item at the time of the report;
• The mine water management system and effluent treatment infrastructure are adequate, with minor modifications, to support the Phase II Expansion while maintaining compliance with applicable effluent quality standards; and
• The environmental management practices at the Wolverine Lake Mine are generally consistent with industry best practices for underground nickel-copper mining operations in the Canadian boreal shield.
We note that the Independent Engineer's Report is an independent technical assessment and does not constitute a legal opinion on the adequacy of the Company's regulatory compliance. However, the report's findings are consistent with and corroborative of our own legal review.
VI. Closing Date Extension — Canadian Regulatory Clearance
This section provides a detailed account of the circumstances surrounding the extension of the closing date for the Offering from April 5, 2022 to April 19, 2022.
Original Expected Closing Date. The Purchase Agreement for the Notes was executed on March 29, 2022, between Torchlight Mining Corp. (as issuer), WLML and TMPI (as guarantors), and Kelvantis Capital Markets LLC (as initial purchaser). The original expected closing date under the Purchase Agreement was April 5, 2022.
Cause of Extension. As of late March 2022, the amended Closure Plan submitted by WLML to the MNDMNRF in connection with the Phase II Expansion remained under review by the Director of Mine Rehabilitation. While Pendleton Ross LLP had received informal assurances from the MNDMNRF that the approval was forthcoming and that no substantive objections had been raised, the formal written approval had not been issued as of the original expected closing date.
Although the amended Closure Plan approval was not, strictly speaking, a contractual condition precedent to the closing of the Offering under the Purchase Agreement, it was deemed advisable by the deal team — in consultation with issuer's counsel, underwriter's counsel, and the Company — to extend the closing date to ensure that this regulatory approval was in hand prior to the issuance of the Notes, given the significance of the Phase II Expansion to the investment thesis and the importance of accurate disclosure regarding the regulatory status of the mine.
Notification of Extension. On March 31, 2022, Vivienne St. Claire (Calderwood & Harkness LLP), acting in her capacity as Responsible Partner on the transaction, notified all relevant parties of the closing date extension. Specifically, Ms. St. Claire communicated the extension by email (a copy of which is included as Appendix F to this memorandum) to the following persons:
• Deepak Rathore, General Counsel & Corporate Secretary, Torchlight Mining Corp.;
• Julian Marchetti, Managing Director, Kelvantis Capital Markets LLC (initial purchaser);
• Harrison Voss, Partner, Clairmont & Voss LLP (counsel to the initial purchaser); and
• Marie-Claire Bouchard, Partner, Pendleton Ross LLP (Canadian counsel to Torchlight).
The email confirmed that the closing date was being extended from April 5, 2022 to April 19, 2022 to allow for the receipt of the amended Closure Plan approval from the MNDMNRF.
Impact on Transaction Terms. No material change to the terms or conditions of the Offering resulted from the two-week extension. The interest rate, maturity, covenants, and other terms of the Notes remained unchanged. No repricing of the Notes was required, and no amendment to the Purchase Agreement was executed. The extension was within the range of standard administrative timelines for MNDMNRF regulatory approvals and was accommodated without objection by the initial purchaser.
Resolution. Pendleton Ross LLP continued to liaise with the MNDMNRF during the extension period. Ms. Bouchard advised that the amended Closure Plan approval was expected imminently and that there were no substantive regulatory objections. The amended Closure Plan approval was received from the MNDMNRF prior to the actual closing date of April 19, 2022, satisfying the remaining regulatory condition and allowing the closing to proceed on schedule.
Assessment. In our assessment, the closing date extension was a prudent and conservative measure that appropriately addressed the timing risk associated with the pending Closure Plan amendment. The delay was attributable to the routine processing timeline of the MNDMNRF and did not reflect any underlying regulatory concern regarding the Phase II Expansion or the environmental compliance posture of the mine. The impact on the transaction was minimal.
VII. Environmental Liabilities and Remediation Obligations
A. Current Remediation Obligations
Based on our review of the materials described in Section II.B and our discussions with management and Canadian counsel, we have not identified any outstanding remediation orders, directions, or cleanup obligations applicable to the Wolverine Lake Mine or to any property owned or operated by WLML, TMPI, or Torchlight.
WLML is conducting a progressive reclamation program at the Wolverine Lake Mine in accordance with the approved Closure Plan. Progressive reclamation involves the rehabilitation of disturbed surface areas on an ongoing basis during the operational life of the mine, rather than deferring all reclamation activities to the post-closure period. This approach is consistent with regulatory requirements and industry best practices. WLML is currently in compliance with its progressive reclamation obligations, and no deficiencies have been identified by the MNDMNRF.
B. Closure and Reclamation Costs
The estimated total closure cost for the Wolverine Lake Mine is specified in the approved Closure Plan and is supported by the financial assurance currently posted by WLML, consisting of a letter of credit and a reclamation trust fund. The amounts of the financial assurance were confirmed during the management interviews conducted February 14–16, 2022, and are consistent with the requirements established by the Director of Mine Rehabilitation.
The Phase II Expansion will necessitate an increase in the estimated total closure cost, reflecting the expanded mine footprint, the additional decline ramp and ventilation raise infrastructure, and the potential expansion of the TSF. The updated closure cost estimate and associated financial assurance requirements are to be finalized upon approval of the amended Closure Plan, which was received prior to the closing date of April 19, 2022. WLML will be required to post the updated financial assurance amounts within the statutory timeframe prescribed by the Director.