PRIVILEGED AND CONFIDENTIAL — ATTORNEY WORK PRODUCT
CALDERWOOD & HARKNESS LLP 450 Park Avenue New York, New York 10022
DUE DILIGENCE MEMORANDUM MATERIAL CONTRACTS & MINING RIGHTS
TO: File — Matter No. 1039-00002
FROM: Audrey Zhou, Lead Associate, Capital Markets Brendan Walsh, Working Associate, Capital Markets
REVIEWED BY: Vivienne St. Claire, Responsible Partner, Capital Markets
DATE: February 2022 (based on due diligence conducted through February 16, 2022 management presentations; updated to reflect delivery of independent engineer's report on February 28, 2022)
RE: Due Diligence Memorandum — Material Contracts & Mining Rights — Torchlight Mining Corp. — $300,000,000 8.750% Senior Secured Notes due 2029
Internal Calderwood & Harkness LLP Work Product — Not for Distribution. This memorandum was prepared solely for use by attorneys at Calderwood & Harkness LLP in connection with the above-referenced matter. It reflects the mental impressions, conclusions, opinions, and legal theories of the attorneys and is protected by the attorney work product doctrine. It is not intended to be, and should not be, distributed to any person or entity outside of Calderwood & Harkness LLP without the express written authorization of the Responsible Partner.
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I. EXECUTIVE SUMMARY AND PURPOSE
A. Purpose
This memorandum summarizes the results of the due diligence review of material contracts and mining rights of Torchlight Mining Corp. ("TMC" or the "Company") and its subsidiaries — Wolverine Lake Mining Ltd. ("WLML"), Torchlight Milling & Processing Inc. ("TMPI"), and Torchlight U.S. Holdings, Inc. ("TUSHI" and, together with WLML and TMPI, the "Guarantor Subsidiaries") — conducted by Calderwood & Harkness LLP ("C&H") in connection with the proposed offering (the "Offering") by TMC of $300,000,000 aggregate principal amount of 8.750% Senior Secured Notes due 2029 (the "Notes") pursuant to Rule 144A and Regulation S under the Securities Act of 1933, as amended (the "Securities Act").
The Notes will be issued under an Indenture dated as of April 19, 2022 (the "Indenture") among TMC, as issuer, the Guarantor Subsidiaries, as guarantors (collectively, the "Guarantors"), and Northern Dominion Trust Company, as trustee and collateral agent (the "Trustee" or "Collateral Agent"). The Notes will be fully and unconditionally guaranteed on a senior secured basis by each Guarantor. The Notes and the Guarantees will be secured by a first-priority lien on substantially all tangible and intangible assets of TMC and the Guarantors, subject to certain exceptions and permitted liens as set forth in the Indenture and the related security documents.
The initial purchasers of the Notes are J.P. Sterling Securities Inc. and Redwood Capital Markets LLC (together, the "Initial Purchasers"). Greystone & Whitfield LLP (David Shin, Partner) serves as Canadian counsel to the Initial Purchasers. Pendleton Ross LLP (Marie-Claire Bouchard, Partner) serves as Canadian counsel to the Issuer.
This memorandum is intended to assist the deal team in (i) evaluating the material contractual obligations and mining rights of TMC and its subsidiaries that are relevant to the Offering, (ii) identifying potential risks, consent requirements, and disclosure issues, and (iii) supporting the delivery of the negative assurance or "10b-5" comfort letter to be provided by C&H in connection with the Offering.
B. Scope
The scope of this memorandum encompasses the following areas of review:
(a) Material Contracts, including: (i) the existing Ridgeline Bank of Canada revolving credit facility (the "Ridgeline Facility"), which will be repaid in full and terminated at closing; (ii) nickel and copper concentrate offtake agreements; (iii) marketing arrangements held by TUSHI; (iv) mining services contracts, including contracts related to the Phase II expansion of the Wolverine Lake mine; (v) intercompany agreements among TMC and its subsidiaries; (vi) equipment leases and purchase agreements; (vii) insurance agreements; and (viii) key executive employment and management agreements;
(b) Mining Rights and Mineral Claims, including: (i) the 47 contiguous mining claims comprising the Wolverine Lake property (Ontario Mining Claim Nos. WL-4492-01 through WL-4492-47); (ii) mineral resource estimates (NI 43-101 compliant); (iii) surface rights, Crown land leases, and access agreements; and (iv) royalty obligations and mining tax considerations; and
(c) Government Permits and Licenses, including: (i) mining permits and operating licenses under the Ontario Mining Act; (ii) environmental permits and approvals; (iii) permits and approvals required for the Phase II expansion; (iv) First Nations and Indigenous consultation obligations; and (v) the assignment and transferability of permits in connection with the Collateral package and potential enforcement scenarios.
C. Sources
In preparing this memorandum, C&H reviewed the documents and materials listed in Section XIII below, which were made available in the virtual data room maintained by TMC (the "Data Room") through the Thackeray Solutions platform. In addition, the following sources informed our analysis:
(i) Management presentations conducted on February 14, 15, and 16, 2022 at the offices of Pendleton Ross LLP in Toronto, Ontario, attended by members of TMC's senior management team, including Deepak Rathore (General Counsel and Corporate Secretary), Lianne Prokopchuk (Chief Financial Officer), Colleen Hébert (Treasurer), and Stavros Katsaros (General Manager, Mine Operations, WLML);
(ii) The independent engineer's report prepared by Cascade Technical Advisors Inc. (Dr. Elaine Whitaker, P.Eng., principal author; Calgary, Alberta office: 1020 – 8th Avenue SW, Suite 400, Calgary, AB T2P 1J2), delivered on February 28, 2022 (the "Independent Engineer's Report");
(iii) Title search reports and mining claim records obtained from the Ontario Ministry of Mines through the Mining Lands Administration System ("MLAS"), coordinated with Pendleton Ross LLP;
(iv) Discussions and correspondence with Pendleton Ross LLP (Marie-Claire Bouchard) regarding Canadian legal matters, including mining tenure, PPSA registration, and First Nations consultation; and
(v) Discussions and correspondence with Greystone & Whitfield LLP (David Shin) in connection with the Initial Purchasers' due diligence review.
D. Key Findings and Flagged Issues
Based on the review described herein, C&H has identified the following key findings and flagged issues, which are discussed in greater detail in the sections indicated:
1. Ridgeline Facility — Repayment and Termination Required at Closing. The Ridgeline Facility must be repaid in full (CAD $140,000,000 drawn amount plus accrued interest, commitment fees, and breakage costs) and terminated contemporaneously with or immediately prior to the issuance of the Notes. The negative pledge and additional indebtedness covenants in the Ridgeline Facility would otherwise be violated by the issuance of the Notes secured by first-priority liens. A payoff letter must be obtained from Ridgeline Bank of Canada, and lien discharge filings under the PPSA must be coordinated. (See Section III.)
2. Offtake Agreements — Anti-Assignment Provisions Require Further Analysis. Certain nickel and copper concentrate offtake agreements contain anti-assignment provisions that may require counterparty consent for the grant of a security interest in the related contract rights to the Collateral Agent. Under applicable UCC and PPSA provisions, the creation of a security interest in a contractual right may not constitute an "assignment" for purposes of anti-assignment clauses; however, the analysis is fact-specific, and we recommend obtaining waivers or consents where commercially practicable. (See Section IV.)
3. Phase II Expansion — Offtake Coverage and Contracting Status. The existing offtake agreements do not fully cover the incremental production volumes contemplated by the Phase II expansion. New or amended offtake agreements will need to be negotiated for Phase II volumes. In addition, certain construction and development contracts for the Phase II expansion have not yet been awarded. (See Sections IV.D and V.B.)
4. Mining Claims — Title Confirmation Pending. Pendleton Ross LLP has commenced title searches for all 47 mining claims comprising the Wolverine Lake property. Preliminary results are consistent with WLML's registered ownership and good standing, but final title search reports have not yet been delivered. Assessment work filings appear current, but final confirmation is pending. (See Section VI.B.)
5. Phase II Permits — Regulatory Timeline. Certain permits and approvals required for the Phase II expansion (including an amendment to the mine closure plan under the Ontario Mining Act and additional environmental approvals) have not yet been obtained. The closing date of the Offering was extended from April 5, 2022 to April 19, 2022 in part due to timing considerations related to Canadian regulatory clearances. (See Section VII.C.)
6. First Nations Consultation — Impact Benefit Agreement Under Negotiation. TMC is in active negotiations with the Matachewan First Nation regarding an impact benefit agreement ("IBA") relating to the Phase II expansion. While an existing accommodation agreement is in place covering Phase I operations, the IBA for Phase II has not been finalized. Failure to complete this process could delay Phase II permits. (See Section VII.D.)
7. Employment Agreements — Change of Control Provisions. Certain key executive employment agreements contain change of control provisions that could be triggered by a future Change of Control event under the Indenture (which would require TMC to offer to repurchase the Notes at 101% of principal amount plus accrued and unpaid interest). Potential severance and benefit acceleration costs are identified. (See Section VIII.D.)
These findings are subject to the qualifications, assumptions, and limitations described throughout this memorandum, and in particular to the resolution of the open items identified in Section XI.
II. CORPORATE STRUCTURE — CONTRACTUAL CONTEXT
An understanding of the corporate structure of TMC and its subsidiaries is essential to the analysis of the material contracts and mining rights discussed in this memorandum. Each entity plays a distinct role in holding and performing material contracts, and the interrelationship among the entities has implications for the security interest and collateral analysis addressed in Section X.
A. Torchlight Mining Corp.
Torchlight Mining Corp. is a corporation incorporated under the Canada Business Corporations Act ("CBCA") and is the parent company and the Issuer of the Notes. TMC's headquarters are located at 2200 – 400 Burrard Street, Vancouver, British Columbia V6C 3A6. Its registered office is located at 1600 – 925 West Georgia Street, Vancouver, British Columbia V6C 3L2 (c/o Pendleton Ross LLP). TMC is the sole shareholder of each of the Guarantor Subsidiaries. TMC serves as the central treasury and financing entity for the consolidated group and is party to the Ridgeline Facility as borrower. TMC is also party to various intercompany agreements with its subsidiaries, as discussed in Section VIII.A.
B. Wolverine Lake Mining Ltd.
Wolverine Lake Mining Ltd. is a corporation incorporated under the Business Corporations Act (Ontario) ("OBCA"). WLML is a wholly owned subsidiary of TMC and serves as the operating entity for the Wolverine Lake mine. WLML is the registered holder of the 47 mining claims comprising the Wolverine Lake property, the surface rights at the property, and the mine operating licenses and environmental permits. WLML is also the contracting party under the principal mining services contracts and certain offtake agreements (primarily those with Canadian counterparties). WLML's registered office is located at 44 Lakeshore Boulevard, Wolverine Lake, Ontario P0L 1R0. The general manager of WLML's mine operations is Stavros Katsaros.
C. Torchlight Milling & Processing Inc.
Torchlight Milling & Processing Inc. is a corporation incorporated under the OBCA. TMPI is a wholly owned subsidiary of TMC and operates the concentrator and processing facilities located adjacent to the Wolverine Lake mine. TMPI processes run-of-mine ore delivered by WLML and produces the nickel and copper concentrates that are sold under the offtake agreements described in Section IV. TMPI holds the environmental permits and approvals relating to the processing operations, including the Environmental Compliance Approval for the concentrator facility. TMPI's registered office is located at 44 Lakeshore Boulevard, Wolverine Lake, Ontario P0L 1R0.
D. Torchlight U.S. Holdings, Inc.
Torchlight U.S. Holdings, Inc. is a corporation incorporated under the General Corporation Law of the State of Delaware. TUSHI is a wholly owned subsidiary of TMC and serves as the holding entity for the Company's U.S. offtake and marketing contracts. TUSHI is the contracting party under certain offtake agreements with U.S.-based smelters and trading houses, and receives payment under those agreements in U.S. dollars. TUSHI's registered office is located at 1209 Orange Street, Wilmington, Delaware 19801 (c/o Crowne Albany Corporation). TUSHI's employer identification number (EIN) is 84-3921057.
E. Guarantor and Security Structure
All three subsidiaries — WLML, TMPI, and TUSHI — will serve as Guarantors under the proposed Indenture, providing full and unconditional guarantees of the Notes on a senior secured basis. In addition, each Guarantor will grant security interests in substantially all of its assets pursuant to the applicable security agreement:
• Canadian General Security Agreement: TMC, WLML, and TMPI will grant a first-priority security interest in substantially all of their respective assets to Northern Dominion Trust Company, as Collateral Agent, pursuant to a General Security Agreement governed by the laws of the Province of Ontario. Security interests will be registered under the Personal Property Security Act (Ontario) ("Ontario PPSA") and, with respect to TMC, under the Personal Property Security Act (British Columbia) and/or the Bank Act (Canada) as applicable.
• U.S. Security Agreement: TUSHI will grant a first-priority security interest in substantially all of its assets to Northern Dominion Trust Company, as Collateral Agent, pursuant to a Security Agreement governed by the laws of the State of New York. Security interests will be perfected by filing UCC-1 financing statements with the Delaware Secretary of State.
The Collateral under the foregoing security agreements includes, among other things, the equity interests held by TMC in each Guarantor Subsidiary, all mining rights, mineral claims, surface rights, accounts receivable, inventory, equipment, intellectual property, contract rights, and intercompany notes. The scope of the Collateral is discussed in greater detail in Section X.
III. EXISTING INDEBTEDNESS — RIDGELINE BANK OF CANADA REVOLVING CREDIT FACILITY
A. Summary of Facility Terms
TMC is currently party to a revolving credit facility with Ridgeline Bank of Canada (the "Ridgeline Facility"), which is the Company's sole existing credit facility and the only material indebtedness of TMC and its subsidiaries as of the date of this memorandum. The principal terms of the Ridgeline Facility are summarized below:
Note Regarding TUSHI Guarantee. The Ridgeline Credit Agreement, as originally executed, did not include TUSHI as a guarantor. The Second Amendment dated June 14, 2021 contemplated the addition of TUSHI as a guarantor upon the execution of a joinder agreement and a U.S. security agreement. Based on our review of the Data Room materials, we have not located an executed TUSHI joinder agreement. During the management presentations on February 15, 2022, Deepak Rathore (General Counsel) indicated that TUSHI was not required to become a guarantor under the Ridgeline Facility because its assets were below the materiality threshold in the Second Amendment (CAD $10,000,000). We have requested confirmation from Pendleton Ross LLP that no TUSHI joinder was executed. This is identified as an open item in Section XI.
B. Change of Control Provisions
Section 8.01(j) of the Ridgeline Credit Agreement defines "Change of Control" as (i) the acquisition by any person or group of persons acting in concert of beneficial ownership of more than 50% of the outstanding voting shares of TMC, or (ii) the failure of TMC to own, directly or indirectly, 100% of the equity interests in each of WLML and TMPI. An Event of Default occurs upon a Change of Control as so defined, which would entitle Ridgeline Bank of Canada to accelerate the outstanding obligations and terminate the commitment.
We have analyzed whether the issuance of the Notes, the execution of the Guarantees, or the granting of security interests under the proposed Indenture and Security Agreements could trigger the Change of Control provision. Our conclusion is as follows:
The issuance of the Notes does not involve any transfer or acquisition of voting shares of TMC and therefore does not fall within clause (i) of the Change of Control definition. The execution of the Guarantees and the granting of security interests by the Guarantor Subsidiaries does not involve any transfer or change in ownership of the equity interests in WLML or TMPI, and therefore does not fall within clause (ii). Accordingly, the Offering does not constitute a "Change of Control" under the Ridgeline Credit Agreement.
However, as discussed in Section III.C below, the Ridgeline Facility is being repaid in full and terminated at closing, which renders this analysis largely academic. The analysis is included for completeness and in the event that the closing of the Offering were to occur before the Ridgeline Facility is terminated.
C. Anti-Assignment and Negative Pledge Provisions
Section 7.01 of the Ridgeline Credit Agreement contains a negative pledge covenant that restricts TMC and its subsidiaries from creating, incurring, or permitting to exist any lien on any of their respective assets, other than certain specified permitted liens. The permitted liens do not include liens securing debt in the principal amount of the Notes. Section 7.02 contains a covenant restricting the incurrence of additional indebtedness without Ridgeline's prior written consent, with limited exceptions for (a) intercompany debt, (b) purchase money indebtedness and capital lease obligations not exceeding CAD $25,000,000 in the aggregate, and (c) other unsecured indebtedness not exceeding CAD $15,000,000 in the aggregate.
The issuance of $300,000,000 of Senior Secured Notes would clearly exceed the permitted thresholds under both the negative pledge and additional indebtedness covenants. The granting of first-priority security interests in substantially all assets of TMC and the Guarantors to the Collateral Agent would violate the negative pledge. Accordingly, the Ridgeline Facility must be repaid in full and terminated contemporaneously with or immediately prior to the closing of the Offering.
Repayment Plan. TMC has confirmed through Lianne Prokopchuk (CFO) and Colleen Hébert (Treasurer) that the Ridgeline Facility will be repaid in full at closing using a portion of the net proceeds from the Offering. The estimated payoff amount is as follows:
The Ridgeline Facility will be terminated upon repayment, and all security interests and liens in favor of Ridgeline Bank of Canada will be released. Lien discharge filings under the Ontario PPSA and British Columbia PPSA will be coordinated by Pendleton Ross LLP. C&H will coordinate with Pendleton Ross on the timing and mechanics of the lien release, including confirmation that PPSA discharge statements have been registered.
A payoff letter is to be obtained from Ridgeline Bank of Canada (attention: Gavin Forde, Relationship Manager) confirming the payoff amount as of the closing date, wire transfer instructions for the payoff, and Ridgeline's agreement to release all liens and deliver lien discharge documentation upon receipt of the payoff amount. As of the date of this memorandum, the payoff letter has been requested but has not yet been received. This is identified as an open item in Section XI.
D. Intercreditor Considerations
No intercreditor agreement is required in connection with the Offering. The Ridgeline Facility will be repaid in full and terminated at closing, and post-closing, the Notes will constitute the sole secured indebtedness of TMC and the Guarantors. The Notes will be secured by a first-priority lien on substantially all assets of TMC and the Guarantors, with no competing secured creditors. In the event that TMC incurs additional secured or unsecured indebtedness in the future (subject to the incurrence covenants in the Indenture), an intercreditor agreement may be required at that time, but no such agreement is contemplated at closing.
IV. OFFTAKE AND MARKETING AGREEMENTS
A. Nickel Concentrate Offtake Agreements
WLML and TUSHI are parties to nickel concentrate offtake agreements with the following counterparties:
1. Sumitake Metals Trading AG (WLML)
WLML is party to a Nickel Concentrate Offtake Agreement dated August 12, 2018, as amended on January 10, 2020 (the "Sumitake Agreement"), with Sumitake Metals Trading AG ("Sumitake"), a Swiss-based trading company. The material terms of the Sumitake Agreement are as follows:
Term: Initial term of five years from first commercial shipment (September 2019), with automatic one-year renewals unless either party provides 180 days' advance written notice of non-renewal. Current expiration: September 2024 (subject to renewal).
Volume Commitment: WLML commits to deliver to Sumitake a minimum of 60% and a maximum of 80% of the nickel-in-concentrate produced at the Wolverine Lake mine, subject to a minimum annual quantity of 10,800 tonnes and a maximum annual quantity of 14,400 tonnes of contained nickel (based on Phase I production capacity of approximately 18,000 tonnes per annum).
Pricing: The price per tonne of contained nickel is determined by reference to the London Metal Exchange ("LME") cash settlement price for primary nickel, averaged over the quotational period (the month of arrival at the delivery point), less: (i) treatment charges ("TC") of $115.00 per dry metric tonne of concentrate; and (ii) refining charges ("RC") of $0.55 per pound of payable nickel. The TC/RC terms are subject to annual review by mutual agreement, with a benchmark adjustment mechanism linked to industry-standard TC/RC settlements.
Delivery: FOB Thunder Bay, Ontario, or CIF Rotterdam, at Sumitake's election (with freight adjustment). Title and risk of loss pass upon delivery.
Quality Specifications: Nickel concentrate containing a minimum of 8.0% Ni and a maximum of 0.50% As, with moisture content not exceeding 9.0%.
Anti-Assignment Provision. Section 14.2 of the Sumitake Agreement provides that neither party may assign or transfer the agreement or any of its rights or obligations thereunder without the prior written consent of the other party, except that either party may assign the agreement to a wholly owned subsidiary without consent, provided that the assigning party remains liable for all obligations. The section further provides that any purported assignment in violation of this provision shall be null and void.
Change of Control. Section 14.3 provides that a "Change of Control" of WLML (defined as the acquisition by any person other than TMC of more than 50% of the voting shares of WLML, or the sale of all or substantially all of the assets of WLML) shall entitle Sumitake to terminate the agreement upon 90 days' written notice. The issuance of the Notes does not constitute a Change of Control of WLML under this definition, as TMC will continue to hold 100% of the equity interests in WLML. However, the granting of a security interest in the equity interests of WLML to the Collateral Agent, and the potential enforcement of that security interest through foreclosure or sale, could constitute a Change of Control if it resulted in a third party acquiring more than 50% of WLML's voting shares or substantially all of WLML's assets.
Security Interest Analysis. The granting of a security interest in WLML's rights under the Sumitake Agreement to the Collateral Agent raises the question of whether such grant constitutes an "assignment" for purposes of Section 14.2. Under the Ontario PPSA, a security interest may be created in contractual rights, and the PPSA generally provides that the creation of a security interest is not an "assignment" that triggers anti-assignment clauses in the underlying contract (subject to certain exceptions). However, to the extent that enforcement of the security interest would result in an actual transfer or assignment of the contract, the anti-assignment provision could be implicated. We recommend obtaining a consent or waiver from Sumitake with respect to the grant of the security interest, to the extent commercially practicable. See Section IX for the consolidated change of control and anti-assignment analysis.
2. Glenborough Resources Inc. (TUSHI)
TUSHI is party to a Nickel Concentrate Purchase and Sale Agreement dated March 5, 2019 (the "Glenborough Agreement"), with Glenborough Resources Inc. ("Glenborough"), a Delaware corporation with offices in Stamford, Connecticut. The material terms of the Glenborough Agreement are as follows:
Term: Initial term of four years from first delivery (October 2019), with automatic two-year renewals unless either party provides 270 days' advance written notice of non-renewal. Current expiration: October 2023 (subject to renewal).
Volume Commitment: TUSHI commits to deliver to Glenborough a minimum of 20% and a maximum of 40% of the nickel-in-concentrate produced at the Wolverine Lake mine, subject to a minimum annual quantity of 3,600 tonnes and a maximum annual quantity of 7,200 tonnes of contained nickel (based on Phase I production capacity). Volumes are delivered to TUSHI by WLML pursuant to an intercompany concentrate sales agreement and then on-sold by TUSHI to Glenborough.
Pricing: The price per pound of payable nickel is determined by reference to the LME cash settlement price, averaged over the quotational period, less: (i) treatment charges of $120.00 per dry metric tonne of concentrate; and (ii) refining charges of $0.58 per pound of payable nickel. Pricing is in U.S. dollars.
Delivery: Ex-Works Wolverine Lake, Ontario, with Glenborough arranging transportation from the mine site to its U.S. processing or storage facilities.
Quality Specifications: Substantially identical to the Sumitake Agreement specifications.
Anti-Assignment Provision. Section 12.1 of the Glenborough Agreement restricts assignment by either party without the prior written consent of the other party, which consent shall not be unreasonably withheld. There is no separate change of control provision.
Security Interest Analysis. The grant of a security interest in TUSHI's rights under the Glenborough Agreement to the Collateral Agent raises the same issues discussed above with respect to the Sumitake Agreement. Under Article 9 of the Uniform Commercial Code as in effect in Delaware and New York, a security interest may be created in a debtor's rights under a contract, notwithstanding a provision in the contract that prohibits assignment. UCC § 9-406(d) provides that a term in a contract between an account debtor and an assignor that prohibits assignment of an account or chattel paper is ineffective to the extent that it prohibits the creation, attachment, or perfection of a security interest. However, this override applies to "accounts" and "chattel paper" as defined in the UCC. To the extent that TUSHI's rights under the Glenborough Agreement are characterized as "payment intangibles" or "general intangibles" rather than "accounts," the UCC § 9-406(d) override may not apply, and the anti-assignment provision could be effective to prevent the creation of a security interest. We recommend further analysis of the UCC characterization of TUSHI's rights under the Glenborough Agreement, as well as obtaining a consent from Glenborough.
B. Copper Concentrate Offtake Agreements
1. Pan Pacific Smelting Ltd. (WLML)
WLML is party to a Copper Concentrate Supply Agreement dated September 22, 2018 (the "Pan Pacific Agreement"), with Pan Pacific Smelting Ltd. ("PPS"), a corporation organized under the laws of Japan with its principal office in Tokyo, Japan and a North American sales office in Vancouver, British Columbia. The material terms of the Pan Pacific Agreement are as follows:
Term: Initial term of six years from first commercial shipment (September 2019), expiring September 2025. Two additional one-year renewal options at PPS's election, exercisable by written notice not less than 12 months prior to expiration.
Volume Commitment: WLML commits to deliver to PPS 100% of the copper-in-concentrate produced at the Wolverine Lake mine, subject to a minimum annual quantity of 5,500 tonnes and a maximum annual quantity of 7,000 tonnes of contained copper (based on Phase I production capacity of approximately 6,100 tonnes per annum).
Pricing: The price per pound of payable copper is determined by reference to the LME cash settlement price for Grade A copper, averaged over the quotational period, less: (i) treatment charges of $80.00 per dry metric tonne of concentrate; and (ii) refining charges of $0.08 per pound of payable copper. Price participation provisions apply if the LME copper price exceeds $4.50/lb.
Delivery: FOB Thunder Bay, Ontario.
Quality Specifications: Copper concentrate containing a minimum of 22.0% Cu, with arsenic content not exceeding 0.30% and bismuth content not exceeding 0.05%.
Anti-Assignment and Change of Control. Section 16.1 of the Pan Pacific Agreement prohibits assignment by either party without the prior written consent of the other party. Section 16.2 provides that a "Change of Control" (defined as any transaction or series of transactions resulting in a change in the direct or indirect controlling ownership of WLML) shall require WLML to provide written notice to PPS within 30 days, and PPS shall have the right to terminate the agreement upon 180 days' notice following receipt of such notification. The analysis regarding the Notes issuance and security interest grant is substantially similar to that described in Section IV.A.1 above with respect to the Sumitake Agreement.
Phase I Production. Current Phase I production of copper-in-concentrate is approximately 6,100 tonnes per annum. The Phase II expansion is expected to increase annual copper-in-concentrate production to approximately 9,600 tonnes per annum, which would exceed the maximum annual quantity under the Pan Pacific Agreement (7,000 tonnes). The implications for the Pan Pacific Agreement are discussed in Section IV.D below.
C. Marketing Arrangements Held by TUSHI
As described in Section II.D, TUSHI serves as the holding entity for TMC's U.S. offtake and marketing contracts. The principal contract held by TUSHI is the Glenborough Agreement described in Section IV.A.2 above. In addition, TUSHI is party to a Marketing Services and Agency Agreement dated January 15, 2020 (the "Marketing Agency Agreement") with Harbourstone Commodities LLC ("Harbourstone"), a New York limited liability company, pursuant to which Harbourstone provides marketing advisory services, logistics coordination, and hedging execution services in connection with TUSHI's U.S. concentrate sales. Harbourstone is compensated through a commission of 1.25% of the net invoice value of concentrates sold through the marketing arrangement.
The Marketing Agency Agreement has a term of three years, expiring January 15, 2023, with automatic one-year renewals. Either party may terminate on 90 days' notice. The agreement does not contain a change of control provision, but does contain an anti-assignment provision requiring consent of the non-assigning party.
Collateral Analysis. The contracts held by TUSHI — including the Glenborough Agreement, the Marketing Agency Agreement, and any accounts receivable, contract rights, or payment rights arising thereunder — constitute "Collateral" under the U.S. Security Agreement dated April 19, 2022 between TUSHI and Northern Dominion Trust Company, as Collateral Agent. TUSHI's accounts receivable from Glenborough and other U.S. customers, its rights under the Glenborough Agreement and the Marketing Agency Agreement, and any intercompany notes or receivables owed to TUSHI by WLML or TMC are all pledged to the Collateral Agent. Perfection will be achieved by filing a UCC-1 financing statement with the Secretary of State of the State of Delaware (TUSHI's jurisdiction of organization). C&H will prepare and file the UCC-1 financing statement at closing.
D. Impact of Phase II Expansion on Offtake Obligations
The Phase II expansion of the Wolverine Lake mine involves the construction of a new decline ramp and ventilation raise to access the Wolverine Deep zone, located approximately 450 meters below the current Phase I mining levels. The Phase II expansion is expected to increase annual nickel-in-concentrate production from approximately 18,000 tonnes to approximately 28,500 tonnes, and annual copper-in-concentrate production from approximately 6,100 tonnes to approximately 9,600 tonnes. Construction is scheduled to commence in Q2 2022, with first ore from the Wolverine Deep zone expected in Q4 2024.
Based on our review of the existing offtake agreements, the following issues arise with respect to Phase II production:
Nickel. The Sumitake Agreement and the Glenborough Agreement together cover between 80% and 100% of Phase I nickel production (minimum 14,400 tonnes, maximum 21,600 tonnes of contained nickel). At Phase II production levels of 28,500 tonnes per annum, these agreements would cover between 50% and 76% of production, leaving a potential uncontracted volume of between 6,900 and 14,100 tonnes per annum. TMC management has indicated (during the February 16, 2022 management presentation) that it intends to negotiate additional offtake agreements or amend the existing agreements to cover Phase II incremental production, but no binding commitments have been entered into as of the date of this memorandum.
Copper. The Pan Pacific Agreement covers 100% of Phase I copper production but has a maximum annual quantity of 7,000 tonnes of contained copper. At Phase II production levels of approximately 9,600 tonnes per annum, approximately 2,600 tonnes of contained copper would be uncontracted. TMC management has indicated that it plans to negotiate an amendment to the Pan Pacific Agreement or enter into a new copper offtake agreement for the incremental volumes.
Indenture Implications. The Indenture will contain covenants restricting the ability of TMC and its subsidiaries to enter into certain types of contracts and transactions, including limitations on the sale of assets. To the extent that new offtake agreements are entered into on terms that are less favorable than the existing agreements, or that involve the sale of concentrate to affiliates or related parties on less-than-arm's-length terms, such transactions could implicate the restricted payments, affiliate transactions, or asset sale covenants under the Indenture. We recommend that the disclosure in the Offering Memorandum include appropriate risk factor language regarding the need to negotiate new offtake arrangements for Phase II volumes and the potential impact on revenue and cash flow if such arrangements are not secured on favorable terms.
V. MINING SERVICES CONTRACTS
A. Overview of Key Mining Services Contracts
WLML, as the operating entity for the Wolverine Lake mine, is party to the following material mining services contracts. All contracts are governed by the laws of the Province of Ontario unless otherwise noted:
1. Driftwood Underground Services Corp. — Underground Development and Production Drilling
WLML is party to a Mine Services Agreement dated May 1, 2018, as amended on September 15, 2020 (the "Driftwood Agreement"), with Driftwood Underground Services Corp. ("Driftwood"), an Ontario corporation with its head office in Sudbury, Ontario. Driftwood provides underground development, production drilling, and blasting services for the Wolverine Lake mine.
Term: Initial term of five years from first production (September 2019), expiring September 2024. One three-year renewal option exercisable by WLML upon 12 months' prior written notice.
Compensation: Cost-plus basis: Driftwood is reimbursed for all direct costs (labour, materials, equipment, and supplies) plus a management fee equal to 12.5% of direct costs. Estimated annual cost under current Phase I operations: CAD $42,000,000 – $48,000,000.
Scope: Lateral development (drifting and cross-cutting), raise boring, production drilling (longhole and slot drilling), blasting (using explosives supplied by a third-party supplier), and mucking. Driftwood provides its own equipment and labour, including specialized underground drilling rigs, jumbos, and load-haul-dump units.
Performance Standards: Driftwood must achieve specified advance rates (minimum 3.5 metres per round for lateral development) and is subject to monthly performance reviews. Persistent failure to meet performance standards constitutes grounds for termination for cause.
Anti-Assignment. Section 22 of the Driftwood Agreement prohibits assignment by either party without the other party's prior written consent, except to an affiliate. No separate change of control provision.
Termination. WLML may terminate the Driftwood Agreement for convenience upon 180 days' prior written notice and payment of a termination fee equal to three months of Driftwood's average monthly management fee. Termination for cause (material breach not cured within 30 days of notice) does not require a termination fee.
2. Borealis Haulage Ltd. — Underground and Surface Haulage
WLML is party to a Haulage Services Agreement dated June 15, 2018 (the "Borealis Agreement"), with Borealis Haulage Ltd. ("Borealis"), an Ontario corporation based in Thunder Bay, Ontario. Borealis provides underground-to-surface haulage of run-of-mine ore and waste rock, as well as surface haulage of ore from the mine portal to the TMPI concentrator facility.
Term: Three-year initial term, renewed for successive one-year terms unless terminated by either party upon 120 days' prior written notice. Currently in its second renewal period, expiring June 2023.
Compensation: Unit rate basis: CAD $4.25 per tonne of material hauled underground-to-surface; CAD $1.10 per tonne of material hauled surface (mine portal to concentrator). Rates subject to annual CPI escalation.
Fleet: Borealis maintains a fleet of articulated underground haul trucks and surface haul trucks at the mine site. Equipment ownership remains with Borealis.
Anti-Assignment. Section 18.1 of the Borealis Agreement prohibits assignment without prior written consent, not to be unreasonably withheld. No change of control provision.
3. Northridge Ventilation Systems Inc. — Ventilation Maintenance
WLML is party to a Ventilation Maintenance and Monitoring Agreement dated October 1, 2019 (the "Northridge Agreement"), with Northridge Ventilation Systems Inc. ("Northridge"), an Ontario corporation based in Timmins, Ontario. Northridge provides ongoing maintenance, monitoring, and calibration services for the primary and auxiliary ventilation systems at the Wolverine Lake mine.
Term: Two-year initial term with automatic one-year renewals. Either party may terminate on 90 days' notice. Currently in its first renewal period, expiring October 2022.
Compensation: Monthly retainer of CAD $175,000 plus parts and materials at cost. Annual estimated cost: CAD $2,400,000 – $2,800,000.
Anti-Assignment. Standard anti-assignment provision requiring consent. No change of control provision.
4. Other Mining Services Contracts
C&H has also reviewed the following contracts, which are summarized briefly here and included in the Schedule of Material Contracts (Section XII):
(a) Explosive Supply Agreement — between WLML and Dynacore Explosives Canada Inc., dated April 1, 2019; supply of bulk emulsion explosives and detonators; annual cost approximately CAD $6,500,000; standard anti-assignment; no change of control provision.
(b) Geotechnical and Ground Support Services — between WLML and RockTech Engineering Corp., dated July 1, 2019; ground support design, shotcrete services, and geotechnical monitoring; annual cost approximately CAD $4,200,000; standard anti-assignment; no change of control provision.
(c) Mine Camp and Catering Services — between WLML and Bravo Camp Services Ltd., dated March 1, 2019; accommodation and catering for mine-site employees and contractors; annual cost approximately CAD $3,800,000; terminable on 60 days' notice.
B. Phase II Expansion — Construction and Development Contracts
The Phase II expansion of the Wolverine Lake mine involves the following principal construction and development work packages:
(i) New Decline Ramp. Construction of a new decline ramp from surface to the Wolverine Deep zone, approximately 1,800 metres in length and 5.0 metres x 5.5 metres in cross-section, to provide primary access for personnel, equipment, and ore transport from the Wolverine Deep zone.
(ii) Ventilation Raise. Raise boring of a primary ventilation raise from surface to the Wolverine Deep zone, approximately 620 metres in depth and 4.0 metres in diameter, to provide fresh air intake and exhaust capacity for Phase II mining levels.
(iii) Underground Infrastructure. Development of underground infrastructure at the Wolverine Deep zone, including level development, ore passes, loading pockets, electrical substations, pump stations, and refuge stations.
(iv) Surface Infrastructure. Upgrades to surface infrastructure, including expansion of the ore stockpile and primary crusher capacity, upgrades to the hoist and shaft system (if applicable), and expansion of the mine waste management area.
The estimated total capital expenditure for the Phase II expansion is CAD $215,000,000 (approximately USD $169,000,000 at the exchange rate of 0.7875), of which approximately USD $167,000,000 will be funded from the net proceeds of the Offering.
Contracting Status. As of the date of this memorandum, the status of contracting for the Phase II expansion is as follows:
Open Items. The definitive contract for the new decline ramp between WLML and Driftwood has not been executed as of the date of this memorandum. The Letter of Intent dated December 15, 2021 is non-binding except for confidentiality, exclusivity (60-day period, expired February 13, 2022), and governing law provisions. The underground infrastructure and surface infrastructure contracts have not been awarded. These items are identified as open items in Section XI. Disclosure in the Offering Memorandum should address the status of Phase II contracting and the risk that cost overruns or delays could affect the project schedule and budget.
C. Assignment and Change of Control Provisions
We have reviewed the change of control, assignment, and consent provisions in each of the material mining services contracts summarized above. The following table presents a consolidated summary:
None of the mining services contracts reviewed requires consent in connection with the issuance of the Notes or the execution of the Guarantees. However, as discussed in Section IV.A.1 above in the context of the offtake agreements, the granting of security interests in WLML's contract rights to the Collateral Agent could theoretically be characterized as an "assignment" triggering the anti-assignment provisions, although we believe this characterization is unlikely under Ontario PPSA principles. We recommend obtaining consents or waivers to the extent commercially practicable.
D. Termination and Force Majeure Provisions
Each of the material mining services contracts reviewed contains termination provisions permitting termination for cause (material breach not cured within a specified notice period, typically 30 days) and, in most cases, termination for convenience upon prior written notice (ranging from 60 to 180 days) and payment of a termination fee or break fee.
Force majeure provisions are included in each of the material mining services contracts. The force majeure definitions are generally consistent across the contracts and include events such as natural disasters, acts of God, fire, flood, explosion, epidemic or pandemic, war, terrorism, riot, civil disturbance, strikes or labour disputes (excluding strikes or labour disputes specific to the contractor's workforce unless industry-wide), government orders or regulations, and other events beyond the reasonable control of the affected party. The force majeure provisions typically suspend the affected party's performance obligations during the continuance of the force majeure event, with an obligation to use reasonable efforts to mitigate the effects of the event. If a force majeure event continues for a specified period (typically 180 days), either party may terminate the affected contract.
We note that the force majeure provisions do not specifically address mine-specific events such as rock bursts, ground stability issues, water inrush, or equipment failures, except to the extent that such events may be subsumed within the broader category of events "beyond the reasonable control of the affected party." The Offering Memorandum should include risk factor disclosure addressing the potential impact of mine-specific operational disruptions on the Company's ability to perform its obligations under the mining services contracts and the offtake agreements.
VI. MINING RIGHTS AND MINERAL CLAIMS
A. Wolverine Lake Property — Overview
The Wolverine Lake mine is a producing underground nickel-copper mine located approximately 85 kilometres northeast of Thunder Bay, Ontario, Canada, in the Wolverine Lake area. The mine property encompasses approximately 12,400 hectares and is accessible by a paved highway and a 15-kilometre gravel access road. The mine was developed by TMC (through WLML) commencing in 2016, with first commercial production achieved in September 2019. The mine currently operates using a combination of sublevel open stoping and longhole stoping methods, with ore processed at the on-site concentrator operated by TMPI.
The Wolverine Lake property is 100% owned through WLML. There are no joint venture partners, royalty interest holders (other than the statutory Ontario Mining Tax and federal/provincial royalty obligations described in Section VI.E), or other third-party interests in the property, other than the security interest held by Ridgeline Bank of Canada (to be released at closing) and the security interest to be granted to the Collateral Agent at closing.
B. Ontario Mining Claims
1. Mining Claim Registration
The Wolverine Lake property is comprised of 47 contiguous mining claims registered under the Ontario Mining Act, R.S.O. 1990, c. M.14, as follows:
Mining Claim Numbers: WL-4492-01 through WL-4492-47
Registered Holder: Wolverine Lake Mining Ltd.
Registration: All 47 claims are registered in the Mining Lands Administration System ("MLAS") maintained by the Ontario Ministry of Mines (now the Ontario Ministry of Northern Development, Mines, Natural Resources and Forestry).
Status: Based on a preliminary search of the MLAS records conducted by Pendleton Ross LLP (Marie-Claire Bouchard) on February 10, 2022, all 47 claims are confirmed in good standing. Assessment work filings are current for all claims, with the most recent assessment work filings having been submitted in November 2021 (covering exploration and development work performed during the 2020-2021 fiscal year).
Claim Type: All 47 claims are "legacy" mining claims recorded prior to the introduction of the online map staking system under the Mining Act Modernization amendments. They have been converted to cell claims under the transitional provisions and are subject to the maintenance requirements applicable to converted claims.
2. Title Searches
Pendleton Ross LLP has been retained to conduct comprehensive title searches for all 47 mining claims comprising the Wolverine Lake property. Title searches include:
(a) Confirmation of registered ownership in the name of Wolverine Lake Mining Ltd.;
(b) Search for registered encumbrances, caveats, liens, and competing claims;
(c) Review of assessment work filings and confirmation that all maintenance requirements (including the payment of annual maintenance fees and the submission of assessment work reports) have been satisfied;
(d) Review of any orders, directions, or administrative actions issued by the Minister of Mines or the Mining and Lands Commissioner with respect to the claims; and
(e) Review of any surface rights dispositions, Crown land patents, or licences of occupation that may overlap with the mining claims.
Preliminary results from Pendleton Ross are consistent with WLML's registered ownership and good standing of all 47 claims. However, final title search reports have not yet been delivered. Pendleton Ross has indicated that the final reports are expected by March 15, 2022. This is identified as an open item in Section XI.
3. Encumbrances. Based on the preliminary MLAS search results, the following encumbrances are registered against the mining claims:
(a) Security Interest — Ridgeline Bank of Canada. A registered security interest in favor of Ridgeline Bank of Canada pursuant to the General Security Agreement dated November 15, 2019, encumbering all present and after-acquired personal property of WLML, including its interest in the mining claims. This security interest is registered under the Ontario PPSA and will be discharged at closing upon repayment and termination of the Ridgeline Facility, as discussed in Section III.C above.
(b) No Other Registered Encumbrances. Based on the preliminary search, no other liens, encumbrances, caveats, or competing claims are registered against the mining claims.
4. Collateral. The mining claims form a core component of the Collateral under the Canadian General Security Agreement to be granted to Northern Dominion Trust Company as Collateral Agent at closing. The security interest in the mining claims will be registered under the Ontario PPSA upon discharge of the Ridgeline security interest. Pendleton Ross LLP will coordinate the PPSA registrations.
We note that mining claims under the Ontario Mining Act are personal property interests (not real property) and can be the subject of PPSA security interest registrations. However, the transferability of mining claims upon enforcement of a security interest may be subject to the approval requirements of the Ontario Mining Act, including compliance with the duty to consult with Indigenous communities. See Section VII.D and VII.E.
C. Mineral Resources — NI 43-101 Compliance
The mineral resource estimates for the Wolverine Lake property have been prepared in compliance with National Instrument 43-101 — Standards of Disclosure for Mineral Projects ("NI 43-101") and the CIM Definition Standards on Mineral Resources and Mineral Reserves (2014). The most recent NI 43-101 technical report was prepared by Cascade Technical Advisors Inc. and filed on SEDAR on March 1, 2022. The Qualified Person responsible for the technical report is Dr. Elaine Whitaker, P.Eng., of Cascade Technical Advisors' Calgary, Alberta office (1020 – 8th Avenue SW, Suite 400, Calgary, AB T2P 1J2).
The mineral resource estimates are summarized as follows:
The Independent Engineer's Report delivered by Cascade Technical Advisors on February 28, 2022 confirmed the following:
(a) The NI 43-101 mineral resource estimates are reasonable and have been prepared in accordance with CIM standards.
(b) The remaining mine life for Phase I operations (mining the current Wolverine Main zone) is estimated at 14 years, based on current production rates and mineral resource estimates.
(c) The Phase II expansion to access the Wolverine Deep zone is technically feasible and would add an estimated 8–10 years of mine life at the increased production rates.
(d) The estimated capital expenditure for the Phase II expansion (CAD $215,000,000) is within the range of reasonable cost estimates for projects of similar scope and complexity.
The Offering Memorandum will include a summary of the mineral resource estimates, the mine plan, and the Independent Engineer's Report, subject to NI 43-101 disclosure requirements. C&H notes that because the Notes will be offered pursuant to Rule 144A and Regulation S and will not be registered under the Securities Act, NI 43-101 compliance is not legally required under U.S. securities law; however, the Company has elected to prepare the technical report in compliance with NI 43-101 as a matter of best practice and to satisfy the requirements of Canadian securities regulators (TMC is a reporting issuer under the securities legislation of the provinces of Ontario and British Columbia).
D. Surface Rights
1. Crown Land Leases
WLML holds a Crown Land Lease dated March 15, 2016 (the "Crown Lease"), granted by the Ontario Ministry of Natural Resources and Forestry, covering approximately 2,800 hectares of Crown land within the Wolverine Lake property boundary. The Crown Lease provides WLML with the right to use and occupy the surface of the leased lands for purposes related to mining operations, including mine infrastructure, waste rock storage, tailings management, processing facilities, camp facilities, and access roads.
Term: 21 years from March 15, 2016, expiring March 15, 2037. Renewable for successive 21-year terms upon application and compliance with renewal conditions.
Rent: Annual rent of CAD $125,000, subject to adjustment every five years based on fair market value assessments.
Assignment: The Crown Lease requires the prior written consent of the Minister for any assignment or subletting. The consent requirement is discussed further in Section VII.E.
2. Fee Simple Surface Rights
WLML also holds fee simple title to approximately 1,600 hectares of private land within and adjacent to the Wolverine Lake property boundary, acquired through a series of arm's-length purchases between 2014 and 2017. Title to these lands is registered in the Land Titles Division of the Land Registry Office for the District of Thunder Bay under PIN numbers 62418-0201 through 62418-0218. We have requested that Pendleton Ross LLP confirm the registration status and search for encumbrances on the fee simple parcels. Preliminary results indicate no registered encumbrances other than the Ridgeline security interest (to be released).
3. Access Agreements
WLML is party to a Road Access and Maintenance Agreement dated June 1, 2016 (the "Access Agreement") with the Township of Wolverine Lake, pursuant to which the Township permits WLML to use and maintain a 15-kilometre gravel access road connecting the mine site to Highway 11/17. WLML is responsible for maintenance and repair of the access road at its own cost. The Access Agreement has a term of 25 years, expiring June 1, 2041, and is renewable.
4. Collateral. The surface rights — including the Crown Lease, the fee simple lands, and the Access Agreement — are included in the Collateral under the Canadian General Security Agreement. Perfection of the security interest in the fee simple lands will require registration of a charge or notice of security interest in the applicable Land Titles Office, which Pendleton Ross LLP will coordinate.