MEMORANDUM
PRIVILEGED AND CONFIDENTIAL — ATTORNEY-CLIENT COMMUNICATION / ATTORNEY WORK PRODUCT This memorandum is protected by the attorney-client privilege and the work product doctrine. It is intended solely for the use of the addressees and authorized recipients identified herein. Any distribution, copying, or disclosure of this memorandum or its contents to any person not authorized to receive it may constitute a waiver of applicable privileges. If you have received this memorandum in error, please notify Calderwood & Harkness LLP immediately and destroy all copies.
FROM: Harrison Wexford and Grace Nakamura, Calderwood & Harkness LLP
TO: Miriam Soo-Hwan Park, General Counsel, Torchlight Mining Corp. Carolyn Bracebridge, Chief Financial Officer, Torchlight Mining Corp.
CC: Beatrice Holloway, Calderwood & Harkness LLP Elliot Nguyen, Calderwood & Harkness LLP Frances Whitmore, CPA, CA, Ridgeline Accounting Partners LLP (copy to be provided at client's discretion) Vivian Okafor, Northspire Capital Markets, Inc. (copy to be provided at client's discretion)
DATE: December 18, 2024
RE: Environmental Liability Accounting — ASC 450 / IAS 37 Considerations in Connection with Multi-Site EPA Consent Decree Negotiation
MATTER NO.: 1039-00003
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I. Executive Summary
The purpose of this memorandum is to analyze the accounting treatment of Torchlight Mining Corp.'s ("TMC" or the "Company") environmental remediation obligations, civil penalties, supplemental environmental project ("SEP") commitments, and related costs arising from the multi-site enforcement action brought by the United States Environmental Protection Agency ("EPA") and the United States Department of Justice ("DOJ"), together with co-plaintiff state agencies, and the consent decree currently under negotiation in United States of America et al. v. Torchlight Mining Corp. et al., Civil Action No. 9:24-cv-00087-DWM, United States District Court for the District of Montana, Missoula Division (the "Enforcement Action" or the "Consent Decree").
TMC is a corporation organized under the Canada Business Corporations Act ("CBCA"), dual-listed on the Toronto Stock Exchange (TSX: TRC) and the New York Stock Exchange (NYSE: TRC). As a Canadian reporting issuer listed on a U.S. exchange, TMC reports its financial statements under International Financial Reporting Standards ("IFRS") as issued by the International Accounting Standards Board ("IASB") for Canadian securities regulatory purposes and is subject to the Securities and Exchange Commission ("SEC") reporting requirements applicable to foreign private issuers under Form 20-F. Accordingly, this memorandum addresses the accounting treatment of the Company's environmental liabilities under both ASC 450 (Contingencies) pursuant to U.S. Generally Accepted Accounting Principles ("U.S. GAAP") and IAS 37 (Provisions, Contingent Liabilities and Contingent Assets) under IFRS.
As of the third quarter of 2024, TMC's environmental remediation reserve as reported on its balance sheet stands at C$340.0 million, which translates to approximately US$251.4 million at the prevailing exchange rate of C$1.00 = US$0.7394. Our analysis, prepared in coordination with Pinnacle Creek Environmental, LLC ("Pinnacle Creek") and Northspire Capital Markets, Inc. ("Northspire"), indicates that the estimated grand total nominal obligation under the Consent Decree is approximately US$409.9 million, comprising the following principal components:
• Environmental remediation costs across four sites: US$343.5 million
• Civil penalties: US$31.5 million
• EPA past-costs reimbursement (CERCLA § 107): US$18.1 million
• Supplemental Environmental Projects: US$12.0 million
• Independent environmental monitor costs: US$4.8 million
On an undiscounted (nominal) basis, the estimated shortfall between TMC's existing reserve and its total obligations under the Consent Decree is approximately US$158.5 million (US$409.9 million minus US$251.4 million). On a net present value ("NPV") basis, using a 3% discount rate applied to the long-duration remediation cost streams, the total obligation is approximately US$311.5 million, resulting in a shortfall on an NPV basis of approximately US$60.1 million (US$311.5 million minus US$251.4 million).
In summary, TMC will need to increase its environmental remediation reserve significantly. The precise magnitude of the increase will depend on: (a) the applicable accounting framework (IFRS versus U.S. GAAP); (b) the discounting methodology employed (mandatory under IAS 37, generally not permitted under ASC 410-30/ASC 450 absent fixed and reliably determinable payment schedules); (c) the extent to which insurance recovery offsets may be recognized as a separate receivable; and (d) the allocation of certain components between "probable/estimable" and "reasonably possible" categories. This memorandum sets forth our detailed analysis and recommendations below.
II. Background and Scope
A. The Enforcement Action
On January 18, 2024, the EPA and the DOJ, joined by three co-plaintiff state environmental agencies, commenced the Enforcement Action by filing a complaint in the United States District Court for the District of Montana, Missoula Division, docketed as Civil Action No. 9:24-cv-00087-DWM, and assigned to the Honorable Donald W. Molloy, United States District Judge. The complaint alleges a broad array of environmental violations spanning four industrial and mining sites owned or operated by TMC and its domestic subsidiaries.
The named defendants in the Enforcement Action are as follows:
1. Torchlight Mining Corp. — the Canadian parent corporation and ultimate owner of all site-operating entities;
2. Torchlight Mining (U.S.) Inc. (EIN: 83-2047156) — the principal U.S. holding company through which TMC conducts its domestic operations;
3. Torchlight Specialty Chemicals, Inc. (EIN: 47-3819204) — the subsidiary operating the Gallatin Chemical Works and Kanawha Bend Chemical Plant;
4. Ridgecrest Mine Holdings, LLC (Montana Secretary of State ID: E1042738) — the entity holding the Ridgecrest Copper-Molybdenum Mine; and
5. Bonanza Creek Mining, LLC (Nevada Secretary of State Entity No.: E0518294731) — the entity operating the Bonanza Creek Gold Mine.
The co-plaintiffs joining the federal action are:
• The State of Montana, acting through the Montana Department of Environmental Quality ("MT DEQ"), with lead counsel Annika Hedstrom;
• The State of Nevada, acting through the Nevada Division of Environmental Protection ("NV DEP"), with lead counsel Ricardo Fuentes; and
• The State of West Virginia, acting through the West Virginia Department of Environmental Protection ("WV DEP"), with lead counsel Loretta May Hatcher.
The complaint alleges violations of the Clean Water Act § 301 (unpermitted discharges of pollutants to waters of the United States), the Resource Conservation and Recovery Act ("RCRA") §§ 3004 and 3005 (violations of hazardous waste management standards and permit conditions), the Comprehensive Environmental Response, Compensation, and Liability Act ("CERCLA") § 107 (liability for response costs at contaminated sites), and the Migratory Bird Treaty Act (unlawful take of migratory birds at the Bonanza Creek facility). These violations are alleged across four separate sites in three states, as described in greater detail below.
B. The Four Sites
The Enforcement Action encompasses the following four facilities, each of which presents distinct environmental remediation challenges and liability profiles:
1. Ridgecrest Copper-Molybdenum Mine Located at 14200 Ridgecrest Mine Road, Drummond, Granite County, Montana 59832. The Ridgecrest Mine was operated from 1978 through 2019 and is currently in the closure and reclamation phase. The site has been proposed for listing on the National Priorities List ("NPL") under CERCLA, and EPA Region 8 has issued an Administrative Order on Consent ("AOC") under Docket No. CERCLA-08-2022-0039 directing initial response activities. The primary environmental concerns at Ridgecrest include extensive acid mine drainage from exposed sulfide-bearing waste rock, contamination of surface water tributaries of the Clark Fork River, and legacy tailings impoundments requiring long-term stabilization and closure. Ridgecrest represents the single largest component of TMC's environmental remediation liability.
2. Gallatin Chemical Works Located at 8800 Industrial Park Lane, Belgrade, Gallatin County, Montana 59714. This specialty chemicals manufacturing facility has been operational since 1993 and remains active. The facility is subject to RCRA Corrective Action requirements under Permit No. MTD098712456. The principal environmental issue is carbon disulfide (CS₂) contamination of groundwater emanating from historical solvent storage and process areas, requiring groundwater extraction, treatment, and long-term monitoring.
3. Bonanza Creek Gold Mine Located at County Road 447, Mile Marker 12, Lander County, Nevada 89820. The Bonanza Creek Mine has been operational since 2001 and remains an active open-pit gold mining operation. The environmental issues at this site include cyanide releases from heap leach pad liner failures and mercury contamination of soils and sediments in the Bonanza Creek drainage. Additionally, the cyanide releases have resulted in documented avian mortality events giving rise to the Migratory Bird Treaty Act claims.
4. Kanawha Bend Chemical Plant Located at 2200 Chemical Valley Road, Institute, Kanawha County, West Virginia 25112. This chemical manufacturing facility has been operational since 1985 and remains active. The facility is subject to RCRA Corrective Action requirements under Permit No. WVD048823915. The environmental concerns include sulfuric acid releases and dense non-aqueous phase liquid ("DNAPL") contamination of the subsurface, necessitating ongoing source removal, containment, and monitored natural attenuation activities.
C. Status of Consent Decree Negotiations
The parties to the Enforcement Action reached an agreement in principle on the material terms of a comprehensive consent decree on July 30, 2024. This agreement followed several months of intensive multiparty negotiations facilitated by a court-appointed settlement master, retired Magistrate Judge Jeremiah Braddock. The DOJ circulated the first draft of the proposed Consent Decree to TMC and its counsel on November 8, 2024. TMC submitted its redline markup of the draft Consent Decree on December 16, 2024, two days prior to the date of this memorandum. Negotiations are ongoing, and the parties currently anticipate that a substantially final text of the Consent Decree will be agreed upon in early February 2025, with lodging of the decree with the Court expected on or about February 19, 2025.
Calderwood & Harkness LLP was engaged as counsel to TMC on October 21, 2024, replacing TMC's prior environmental counsel, Whitfield, Palmer & Goss LLP, which had represented TMC through the initial stages of the Enforcement Action and the agreement-in-principle phase. Calderwood & Harkness's engagement encompasses representation in the Consent Decree negotiations, analysis of the associated accounting and financial reporting obligations (including the subject matter of this memorandum), and coordination with TMC's external auditors and financial advisors.
Pinnacle Creek Environmental, LLC ("Pinnacle Creek"), led by Dr. Astrid Bergmann, P.E., serves as TMC's environmental remediation consultant for all four sites. Pinnacle Creek has prepared independent cost estimates for the remediation work required under the Consent Decree, which form the basis for the financial estimates used throughout this memorandum. The EPA's independent technical expert, Dr. Patricia Voss of Cascade Geosciences, Inc., has also prepared cost estimates, which were used as a reference point during negotiation of the remediation cost provisions.
Northspire Capital Markets, Inc. ("Northspire"), through Vivian Okafor, is advising TMC on financial structuring matters related to the Consent Decree, including financial assurance instruments, insurance recovery strategy, and credit facility covenant compliance.
Ridgeline Accounting Partners LLP ("Ridgeline"), through Frances Whitmore, CPA, CA, serves as TMC's PCAOB-registered external auditor and is responsible for auditing TMC's annual financial statements, including the environmental remediation reserve.
D. Scope of This Memorandum
This memorandum addresses the following matters:
1. Recognition requirements: Analysis of when and under what conditions TMC must recognize (i.e., record on its balance sheet) the various categories of obligations arising from the Consent Decree, under both ASC 450 (U.S. GAAP) and IAS 37 (IFRS).
2. Measurement requirements: Analysis of the appropriate measurement basis for each category of obligation, including site-by-site remediation cost estimates, civil penalty amounts, EPA past-costs reimbursement, SEP commitments, and independent monitor costs.
3. discounting methodology: Assessment of whether and how discounting to present value should be applied under each accounting framework, and the impact of discounting on the total recognized liability.
4. Insurance recovery offsets: Analysis of the recognition and presentation of potential insurance recoveries from Meridian Environmental Insurance Company, including the impact of the pending coverage dispute.
5. Timing of recognition: Identification of the appropriate timing for recognition of the various components of the Consent Decree obligation, with reference to the negotiation timeline and the expected dates of Consent Decree lodging and entry.
6. Reserve adjustment: Quantification of the reserve adjustment required under each framework.
7. Coordination recommendations: Recommendations for coordination with Ridgeline Accounting Partners LLP, Northspire Capital Markets, Inc., and TMC's tax advisors.
This memorandum does not address in detail the SEC disclosure analysis (which will be the subject of a separate memorandum to be prepared in March 2025), the Canadian securities law continuous disclosure requirements (which are being addressed by TMC's Canadian securities counsel, Burford & Associates LLP), or the tax planning strategies related to the Consent Decree (which should be coordinated with TMC's tax advisors). References to these topics are included herein for context and to identify areas requiring further analysis.
III. Applicable Accounting Standards — Overview
A. ASC 450 — Contingencies (U.S. GAAP)
The principal U.S. GAAP standard governing the recognition and measurement of TMC's environmental liabilities is Accounting Standards Codification ("ASC") Topic 450, Contingencies, and specifically ASC 450-20, Loss Contingencies. In addition, ASC 410-30, Environmental Obligations — Asset Retirement Obligations, provides supplemental guidance specific to environmental remediation liabilities. We summarize the key provisions of each below.
ASC 450-20 — Loss Contingencies. Under ASC 450-20-25-2, a loss contingency must be accrued (i.e., recognized as a liability and charged against earnings) when two conditions are met: (1) information available prior to the issuance of the financial statements indicates that it is probable that a liability has been incurred at the date of the financial statements, and (2) the amount of the loss can be reasonably estimated. The term "probable" under ASC 450 is defined to mean "likely to occur," which is generally interpreted by the accounting profession and the SEC staff as requiring a significantly higher degree of certainty than a mere preponderance — typically in the range of 75% to 80% probability or greater, though no precise numerical threshold is specified in the authoritative literature.
Where the estimated loss falls within a range, and no single amount within that range is a better estimate than any other amount, the entity is required to accrue the minimum of the range. If one amount within the range is a better estimate than the others, that amount should be accrued. This "range minimum" convention is a distinctive feature of U.S. GAAP that can result in lower accruals compared to the IFRS "best estimate" approach discussed below.
For loss contingencies that are reasonably possible (i.e., more than remote but less than probable), ASC 450-20-50 requires disclosure of the nature of the contingency, together with an estimate of the possible loss or range of loss, or a statement that such an estimate cannot be made. No accrual is required for reasonably possible contingencies.
Loss contingencies that are remote (i.e., the chance of occurrence is slight) generally require no accrual and no disclosure, with certain exceptions for guarantees and similar obligations.
ASC 410-30 — Environmental Obligations. ASC 410-30 provides specific guidance on the recognition and measurement of environmental remediation liabilities. This guidance is particularly relevant to TMC's situation because it addresses the types of costs associated with remediation of contaminated sites under CERCLA, RCRA, and other environmental statutes. Under ASC 410-30-25, an environmental remediation liability should be recognized when it is probable that a liability has been incurred and the amount can be reasonably estimated. ASC 410-30 contemplates that recognition of environmental remediation liabilities is typically triggered when one or more of the following events occur: (a) litigation has been commenced or a claim has been asserted; (b) a regulatory body has asserted a violation or indicated that it will assert a claim; (c) the entity has been identified as a potentially responsible party ("PRP") at a CERCLA site; or (d) the entity has determined that it is responsible for remediation based on its own investigation.
With respect to measurement, ASC 410-30-30 provides that the recognized amount should include the estimated costs of remediation, monitoring, and related activities, measured on a site-by-site basis. The measurement should be based on currently available information, including site assessments, remedial investigation/feasibility studies, and engineering cost estimates. Importantly, ASC 410-30-35 states that discounting of environmental remediation liabilities is permitted only when the aggregate amount of the obligation and the amount and timing of cash payments are fixed or reliably determinable. In practice, this standard is applied restrictively, and most environmental remediation liabilities under U.S. GAAP are accrued on an undiscounted basis because remediation programs typically involve variable costs and uncertain timing.
B. IAS 37 — Provisions, Contingent Liabilities and Contingent Assets (IFRS)
Under IFRS, the governing standard is IAS 37, Provisions, Contingent Liabilities and Contingent Assets. IAS 37 establishes the recognition, measurement, and disclosure requirements for provisions (which are liabilities of uncertain timing or amount), contingent liabilities (which are not recognized on the balance sheet but may require disclosure), and contingent assets.
Recognition. Under IAS 37.14, a provision shall be recognized when all three of the following conditions are met: (1) the entity has a present obligation (legal or constructive) as a result of a past event; (2) it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation; and (3) a reliable estimate can be made of the amount of the obligation. The critical difference from U.S. GAAP lies in the definition of "probable." Under IAS 37.23, "probable" is defined as "more likely than not," which means the probability threshold is greater than 50%. This is a materially lower threshold than the approximately 75%–80% probability typically associated with the "probable" standard under ASC 450, meaning that obligations that might be characterized as merely "reasonably possible" under U.S. GAAP could still meet the recognition threshold under IFRS.
Measurement. Under IAS 37.36, the amount recognized as a provision shall be the best estimate of the expenditure required to settle the present obligation at the balance sheet date. The best estimate is described in IAS 37.39–40 as the amount that an entity would rationally pay to settle the obligation at the balance sheet date or to transfer it to a third party at that time. For a large population of items, the best estimate is the expected value (probability-weighted average). For a single obligation, the best estimate may be the individual most likely outcome, although other possible outcomes should be considered. If there is a continuous range of possible outcomes and each point in the range is equally likely, the midpoint of the range is used. This "best estimate" methodology typically results in higher accruals than the ASC 450 "range minimum" approach.
discounting. IAS 37.45–47 explicitly require that, where the effect of the time value of money is material, the amount of a provision shall be the present value of the expenditures expected to be required to settle the obligation. The discount rate to be used is a pre-tax rate that reflects current market assessments of the time value of money and the risks specific to the liability. The discount rate should not reflect risks for which the future cash flow estimates have already been adjusted. The unwinding of the discount over time is recognized as a finance cost. This mandatory discounting requirement is a significant difference from U.S. GAAP, where discounting is generally not permitted for environmental remediation liabilities.
Contingent Liabilities. Under IAS 37.27–28, a contingent liability is not recognized on the balance sheet. A contingent liability exists when: (a) there is a possible obligation that arises from past events and whose existence will be confirmed only by the occurrence or non-occurrence of one or more uncertain future events not wholly within the control of the entity; or (b) there is a present obligation that arises from past events but is not recognized because it is not probable that an outflow of resources will be required or the amount cannot be reliably estimated. Contingent liabilities are disclosed in the notes to the financial statements unless the possibility of outflow is remote.
C. Key Differences Relevant to TMC
The following table summarizes the key differences between ASC 450/ASC 410-30 and IAS 37 that are material to TMC's accounting analysis:
These differences are directly consequential for TMC. Because TMC reports under IFRS as its primary framework but must provide a U.S. GAAP reconciliation in its Form 20-F filed with the SEC, the Company may arrive at different liability amounts under the two frameworks. In particular:
• The lower probability threshold under IAS 37 means that certain components of the Consent Decree obligation that might be classified as "reasonably possible" under ASC 450 (and therefore only disclosed, not accrued) could nonetheless meet the IAS 37 recognition threshold and require accrual under IFRS.
• The mandatory discounting under IAS 37 will result in a lower recognized liability for the long-duration remediation obligations compared to the undiscounted amounts that would generally be accrued under U.S. GAAP.
• The "best estimate" measurement basis under IAS 37 may produce a different accrual amount than the "range minimum" approach under ASC 450 where remediation cost estimates are expressed as ranges.
These differences and their quantitative impact are analyzed in detail in Parts IV and V below.
IV. Analysis by Category of Obligation
A. Remediation Costs — All Four Sites
1. Recognition. The Consent Decree, once entered by the Court, will create a legally binding and enforceable obligation requiring TMC and its subsidiary defendants to perform and fund specified remediation activities at all four sites. Even prior to the formal entry of the Consent Decree, however, the recognition criteria under both accounting frameworks are satisfied at the present time, for the following reasons:
First, the parties reached an agreement in principle on the material terms of the Consent Decree on July 30, 2024. The first formal draft of the Consent Decree was circulated by the DOJ on November 8, 2024, and TMC submitted its redline markup on December 16, 2024. Although negotiations remain ongoing with respect to certain implementation details, the substantive terms — including the scope of remediation work, the estimated costs, the penalty amounts, and the financial assurance requirements — are substantially settled. Under these circumstances, the entry of the Consent Decree is more likely than not under the IAS 37 standard and, in our assessment, is probable under the higher ASC 450 threshold as well, given the advanced stage of negotiations and the absence of any fundamental disagreements that would derail the settlement.
Second, and independently of the Consent Decree itself, the underlying environmental contamination at all four sites constitutes a past event giving rise to a present obligation. The past environmental events are established facts not subject to material dispute:
• At Ridgecrest, decades of copper-molybdenum mining have resulted in extensive acid mine drainage, tailings contamination, and surface water degradation, as documented in multiple site assessments and EPA enforcement actions dating back to 2022.
• At Gallatin Chemical Works, historical operations involving carbon disulfide (CS₂) have resulted in groundwater contamination, as documented in RCRA facility investigations conducted under the existing corrective action permit.
• At Bonanza Creek, cyanide releases from heap leach pad liner failures and mercury contamination of soils and sediments have been documented through regulatory inspections and TMC's own environmental monitoring data.
• At Kanawha Bend, sulfuric acid releases and DNAPL contamination have been the subject of RCRA corrective action requirements for over a decade, as documented in facility investigation reports and corrective measures studies.
Third, under ASC 410-30, an environmental remediation liability should be recognized when a regulatory body has asserted or it is probable that a regulatory body will assert a claim against the entity. Here, that threshold was exceeded well before the current date: the EPA issued a Notice of Violation ("NOV") to TMC on September 12, 2023, and the DOJ filed the complaint initiating the Enforcement Action on January 18, 2024. The filing of the complaint and the commencement of federal court litigation unambiguously establish that the regulatory assertion criterion is met.
Conclusion: The recognition criteria under both ASC 450/ASC 410-30 and IAS 37 are fully satisfied for remediation cost obligations at all four sites. TMC has a present legal obligation arising from past environmental events, it is probable (under both the ASC 450 and IAS 37 probability thresholds) that an outflow of resources will be required, and reliable estimates of the amounts can be made based on the engineering cost analyses prepared by Pinnacle Creek Environmental and the negotiated terms of the Consent Decree.
2. Measurement — Site-by-Site Breakdown. The measurement of the remediation cost obligation is based on the negotiated remediation cost figures reflected in the current draft of the Consent Decree, informed by the independent cost estimates prepared by TMC's environmental consultant (Pinnacle Creek Environmental, Dr. Astrid Bergmann) and the government's technical expert (Cascade Geosciences, Inc., Dr. Patricia Voss). The analysis is presented on a site-by-site basis below, consistent with the site-by-site measurement approach required by ASC 410-30.
Ridgecrest Copper-Molybdenum Mine
The negotiated remediation cost for the Ridgecrest site is US$198.6 million, to be expended over a remediation period of approximately 30 years. This figure represents a negotiated compromise between TMC's own cost estimate of US$187.5 million (prepared by Pinnacle Creek) and the EPA's cost estimate of US$224.0 million (prepared by Cascade Geosciences). The differential between the two estimates reflects differences in assumptions regarding the scope and duration of long-term water treatment requirements, the design criteria for the tailings impoundment cover system, and the anticipated costs of passive versus active treatment of acid mine drainage.
On a present-value basis, using a 3% discount rate and a 30-year payment horizon, the NPV of the Ridgecrest remediation obligation is approximately US$134.9 million (US$198.6 million × 0.6795 present value factor). The 3% discount rate was selected by Pinnacle Creek and Northspire as a reasonable approximation of a pre-tax risk-free rate adjusted for the specific characteristics of the obligation, and is discussed further in Section IV.A.3 below.
Ridgecrest represents the single largest component of TMC's environmental remediation liability, accounting for approximately 57.8% of the total nominal remediation cost and approximately 55.0% of the total NPV remediation cost. This concentration of liability at a single site warrants particular attention in the measurement analysis and the assessment of estimation uncertainty.
Gallatin Chemical Works
The negotiated remediation cost for the Gallatin Chemical Works site is US$42.8 million, to be expended over a remediation period of approximately 15 years. The remediation program encompasses groundwater extraction and treatment, CS₂ source area soil remediation, long-term groundwater monitoring, and institutional controls. The cost estimate was prepared by Pinnacle Creek and is consistent with the Corrective Measures Study approved by EPA Region 8 in March 2024.
On a present-value basis, using a 3% discount rate and a 15-year payment horizon, the NPV of the Gallatin remediation obligation is approximately US$34.1 million (US$42.8 million × 0.7969 present value factor).
Bonanza Creek Gold Mine
The negotiated remediation cost for the Bonanza Creek Gold Mine is US$63.2 million, to be expended over a remediation period of approximately 20 years. The remediation program includes heap leach pad closure and capping, cyanide-affected groundwater treatment, mercury-contaminated soil excavation and disposal, and long-term ecological monitoring of the Bonanza Creek watershed. The cost estimate was prepared by Pinnacle Creek in consultation with NV DEP's technical staff.
On a present-value basis, using a 3% discount rate and a 20-year payment horizon, the NPV of the Bonanza Creek remediation obligation is approximately US$47.1 million (US$63.2 million × 0.7454 present value factor).
Kanawha Bend Chemical Plant
The negotiated remediation cost for the Kanawha Bend Chemical Plant is US$38.9 million, to be expended over a remediation period of approximately 20 years. The remediation program includes DNAPL source zone treatment, sulfuric acid neutralization and containment, groundwater monitoring and treatment, and indoor air vapor intrusion mitigation for nearby residential properties. The cost estimate was prepared by Pinnacle Creek in consultation with WV DEP's technical staff.
On a present-value basis, using a 3% discount rate and a 20-year payment horizon, the NPV of the Kanawha Bend remediation obligation is approximately US$29.0 million (US$38.9 million × 0.7454 present value factor).
Total Remediation Costs — All Sites
3. Discounting Considerations. The question of whether to accrue the remediation obligation on a discounted or undiscounted basis is one of the most consequential accounting judgments TMC faces, given the significant difference between the nominal and NPV amounts (US$343.5 million versus US$245.1 million, a differential of US$98.4 million).
Under IAS 37:
Discounting is mandatory. IAS 37.45 states: "Where the effect of the time value of money is material, the amount of a provision shall be the present value of the expenditures expected to be required to settle the obligation." For remediation programs spanning 15 to 30 years, the time value of money is clearly material: the differential between nominal and NPV amounts represents approximately 28.6% of the nominal remediation cost. Accordingly, TMC's IFRS-basis provision for remediation costs should be measured at present value.
The discount rate to be used under IAS 37.47 is "a pre-tax rate (or rates) that reflect(s) current market assessments of the time value of money and the risks specific to the liability." The 3% discount rate used by Pinnacle Creek and Northspire in the cost estimates referenced in this memorandum represents a reasonable starting point. As of mid-December 2024, the yield on 30-year U.S. Treasury bonds is approximately 4.5%, and the yield on 20-year bonds is approximately 4.4%. However, IAS 37 specifies that the discount rate should not reflect risks for which future cash flow estimates have already been adjusted; if the cost estimates already incorporate a degree of conservatism (risk adjustment), a lower discount rate may be appropriate. We recommend that TMC engage with Ridgeline Accounting Partners to validate the appropriateness of the 3% rate in light of current market conditions, the specific risk profile of the remediation obligations, and the adjustments already embedded in the Pinnacle Creek cost estimates.
Under IFRS, the unwinding of the discount over time (i.e., the periodic accretion of the provision from its discounted amount toward its undiscounted settlement amount) is recognized as a finance cost, reported in the income statement. TMC should plan for annual accretion charges of approximately US$7.4 million in the first year (3% × US$245.1 million), increasing over time as the discounted provision grows.
Under ASC 410-30 / ASC 450:
Discounting of environmental remediation liabilities under U.S. GAAP is permitted only when the aggregate amount of the obligation and the amount and timing of cash payments for the obligation are fixed or reliably determinable. This standard is applied restrictively. In most cases, environmental remediation programs involve significant uncertainty regarding the timing and magnitude of annual expenditures, and as a result, most registrants accrue environmental remediation liabilities on an undiscounted basis.
The Consent Decree will establish milestone schedules, performance standards, and annual work plan requirements for each site, which will provide some structure to the anticipated payment stream. However, actual annual expenditures may vary substantially from the anticipated schedule due to unforeseen site conditions, changes in regulatory requirements, and the inherent uncertainty of long-duration environmental remediation programs. The EPA retains authority under the Consent Decree to require additional or modified remediation measures if performance standards are not achieved, which further complicates the determination of a fixed and reliably determinable payment schedule.
The conservative position under U.S. GAAP is to accrue the remediation obligation on an undiscounted basis at US$343.5 million. If, however, TMC can demonstrate — and Ridgeline Accounting Partners concurs — that the Consent Decree payment schedule constitutes a sufficiently fixed and reliably determinable payment schedule, discounting may be acceptable. We note that several large mining and chemical companies have successfully defended discounted environmental reserves in their SEC filings, but such treatment has also attracted SEC staff comment letters requesting justification.
Recommendation: For IFRS reporting purposes, we recommend that TMC accrue the remediation cost obligation at NPV (approximately US$245.1 million for remediation alone), using a validated pre-tax discount rate. For U.S. GAAP purposes (including the Form 20-F reconciliation), we recommend accruing on an undiscounted basis (US$343.5 million) unless TMC and Ridgeline Accounting Partners can develop a defensible basis for discounting under ASC 410-30. In either case, the chosen approach should be clearly disclosed in the notes to the financial statements, including the discount rate used (if applicable), the undiscounted amount, and the expected timing of expenditures.
B. Civil Penalties
The Consent Decree provides for a total civil penalty of US$31.5 million, allocated across the four sites as follows:
The civil penalty is payable in four equal installments according to the following schedule:
• 25% (US$7.875 million): due within 30 days of the date of entry of the Consent Decree;
• 25% (US$7.875 million): due 12 months after the date of entry;
• 25% (US$7.875 million): due 24 months after the date of entry; and
• 25% (US$7.875 million): due 36 months after the date of entry.
Recognition. The obligation to pay civil penalties arises from the Consent Decree as a component of the settlement of the Enforcement Action. Given the agreement in principle and the advanced stage of negotiations, the penalty obligation is probable under both the ASC 450 and IAS 37 frameworks, and the amount is precisely determinable at US$31.5 million. The recognition criteria are met.
Measurement. The total penalty of US$31.5 million should be accrued in full. The payment schedule spans only 36 months, and the effect of discounting over this relatively short period is immaterial (at a 3% discount rate, the NPV of the four quarterly installments would be approximately US$30.6 million, a differential of less than 3%). Accordingly, the penalty should be accrued at its face value of US$31.5 million under both IFRS and U.S. GAAP.
Classification and Tax Treatment. Civil penalties are classified as a loss in the income statement. They should not be combined with or classified as environmental remediation costs, as they represent punitive rather than remedial expenditures. Critically, civil penalties imposed by a government or governmental entity for violations of law are not deductible for U.S. federal income tax purposes under Internal Revenue Code § 162(f), as amended by the Tax Cuts and Jobs Act of 2017. This non-deductibility affects the deferred tax asset analysis: no deferred tax asset should be recognized with respect to the civil penalty accrual. The Canadian income tax treatment should be confirmed with TMC's tax advisors, but generally, fines and penalties imposed by regulatory bodies are similarly non-deductible under the Income Tax Act (Canada).
C. EPA Past-Costs Reimbursement (CERCLA § 107)
The Consent Decree requires TMC to reimburse the EPA for past response costs incurred by the agency in connection with two of the four sites, in the aggregate amount of US$18.1 million, broken down as follows:
• Ridgecrest: US$14.3 million, representing reimbursement of EPA response costs incurred in connection with emergency removal actions and site stabilization activities conducted at Ridgecrest from 2021 through 2023, including the emergency diversion of acid mine drainage from Flint Creek during the spring 2022 runoff event.
• Kanawha Bend: US$3.8 million, representing reimbursement of EPA emergency response costs incurred in connection with the December 2020 sulfuric acid release incident and associated DNAPL migration, including emergency groundwater sampling and residential vapor intrusion assessments.
Recognition. The EPA past-costs reimbursement represents an obligation to reimburse costs already incurred by the government. TMC's liability for these costs is established by CERCLA § 107(a) strict, joint, and several liability, independent of the Consent Decree. The Consent Decree will resolve and liquidate this liability at the agreed-upon amounts. The recognition criteria are clearly satisfied under both frameworks: there is a present legal obligation arising from past events, an outflow of resources is virtually certain, and the amount is precisely determined.
Measurement. The full US$18.1 million should be accrued. The reimbursement obligation is a lump-sum amount due upon entry of the Consent Decree or within a short period thereafter (the current draft provides for payment within 60 days of the Effective Date). No discounting is required or appropriate given the short time horizon.
D. Supplemental Environmental Projects (SEPs)
The Consent Decree includes obligations for TMC to fund and implement three Supplemental Environmental Projects ("SEPs") with a total cost of US$12.0 million:
1. Flint Creek Watershed Restoration Project (Montana): US$5.5 million, to fund riparian habitat restoration, fish passage improvement, and water quality monitoring in the Flint Creek watershed downstream of the Ridgecrest Mine. Implementation period: 5 years from the Effective Date.
2. Battle Mountain Community Drinking Water Improvement Project (Nevada): US$3.5 million, to fund the construction of a new community drinking water treatment system and distribution infrastructure for the unincorporated community of Battle Mountain, Lander County, Nevada, located approximately 25 miles from the Bonanza Creek Mine. Implementation period: 3 years from the Effective Date.
3. Institute Community Air Quality Monitoring Network (West Virginia): US$3.0 million, to fund the installation and operation of a network of ambient air quality monitoring stations in the Institute community, Kanawha County, West Virginia, near the Kanawha Bend Chemical Plant. The project includes installation of monitoring stations (approximately US$1.2 million) and ten years of operation and maintenance (approximately US$1.8 million).
Recognition. SEPs are a negotiated component of the Consent Decree settlement, agreed upon as an alternative to a portion of the civil penalty that would otherwise have been imposed. Once the Consent Decree is entered, TMC will be legally obligated to fund and implement each SEP in accordance with the specified terms and timelines. Given the agreement in principle and the advanced stage of negotiations, the obligation to perform the SEPs is probable under both frameworks and the amounts are reliably estimable at the specified project costs. The recognition criteria are met.
Measurement. The full US$12.0 million should be accrued. Although the implementation periods vary (up to 10 years for the Institute Air Quality Monitoring Network), TMC's commitment is to fund the full amount of each project, and the total committed expenditure is determinable. We note that the 10-year operating commitment for the Institute monitoring network could support a partial discounting analysis under IAS 37, but the amounts involved are relatively modest (US$1.8 million over 10 years for the operating component), and the discounting effect would not be material. Accordingly, we recommend accruing the full US$12.0 million at face value under both frameworks.
Tax and Classification Considerations. The tax treatment of SEP expenditures is nuanced. Under current IRS guidance, SEP expenditures generally are treated as penalty substitutes and are therefore not deductible under IRC § 162(f) to the extent they are made "at the direction of" or "pursuant to the order of" a governmental entity. However, certain portions of SEP expenditures may be deductible if they constitute remediation of environmental contamination that the taxpayer would otherwise be obligated to perform, or if they qualify as costs of coming into compliance with the law. The deductibility of the three specific SEPs should be analyzed by TMC's tax advisors on a project-by-project basis. For book purposes, certain components (such as the installation of monitoring stations at Institute) may qualify as capital expenditures and be depreciated, while others will be expensed as incurred.
E. Independent Monitor Costs
The Consent Decree provides for the appointment of a court-appointed independent environmental monitor to oversee TMC's compliance with the terms of the decree. The designated monitor is Verdant Analytics, Inc., a Portland, Oregon-based environmental consulting firm, under the direction of Dr. Kamal Osei, Senior Managing Director. The independent monitor's responsibilities include periodic site inspections, review of TMC's environmental compliance reports, assessment of remediation progress against performance milestones, and preparation of semi-annual reports to the Court.
The estimated cost of the independent monitor is US$4.8 million over a five-year monitoring period, equating to approximately US$960,000 per year. This estimate is based on the proposed monitoring scope and budget submitted by Verdant Analytics and included in the current draft of the Consent Decree.
Recognition. The independent monitor costs are a direct and necessary consequence of the Consent Decree. Under both ASC 450 and IAS 37, if the entry of the Consent Decree is probable (which we have determined it is, for the reasons discussed in Section IV.A.1 above), and the monitor costs are a condition of the decree, then the obligation to fund these costs should be recognized.
Measurement. The estimated cost of US$4.8 million over five years should be accrued. We note that discounting this amount over a five-year period at 3% would reduce the recognized amount to approximately US$4.4 million, a differential of approximately US$400,000. This differential is not material in the context of TMC's overall environmental liability. We recommend accruing the monitor costs at their undiscounted amount of US$4.8 million for simplicity and consistency. However, if TMC's IFRS financial statements present all Consent Decree obligations on a present-value basis for consistency, the US$4.4 million NPV figure may be used for the independent monitor costs as well.
F. Aggregate Obligation Summary Table
The following table summarizes the total estimated obligation under the Consent Decree, on both a nominal (undiscounted) and NPV (Discounted) basis:
The grand total nominal obligation is US$409.9 million. The grand total on an NPV/cash-equivalent basis is approximately US$311.5 million. The differential of approximately US$98.4 million represents the time value of money effect on the long-duration remediation cost streams.
V. Comparison to Existing Reserve and Reserve Adjustment Analysis
A. Current Reserve
As of the end of the third quarter of 2024, TMC's environmental remediation reserve as reported on its consolidated balance sheet is C$340.0 million. This reserve was established and adjusted over time to reflect TMC's estimated remediation obligations across its portfolio of operating and legacy sites, including the four sites that are the subject of the Enforcement Action. The reserve is reported in TMC's interim financial statements filed with Canadian securities regulators and in its Form 6-K filed with the SEC.
For purposes of this analysis, we convert the existing reserve to U.S. dollars at the exchange rate of C$1.00 = US$0.7394, which represents the Bank of Canada daily average rate as of December 13, 2024. At this rate, the existing reserve is equivalent to approximately US$251.4 million.
We note that the existing reserve may include accruals for environmental obligations at other TMC sites not involved in the Enforcement Action. However, based on our discussions with TMC management and review of the reserve composition schedules provided to us, substantially all of the existing reserve relates to the four Consent Decree sites. To the extent that any portion of the existing reserve relates to other sites, the shortfall analysis below would understate the required adjustment.
B. Reserve Shortfall — Nominal Basis (U.S. GAAP)
If the total obligation is accrued on an undiscounted (nominal) basis, as is the conservative and generally required position under U.S. GAAP (ASC 410-30/ASC 450), the reserve shortfall is calculated as follows:
Total nominal obligation: US$409.9 million Less: Existing reserve (US$ equivalent): US$251.4 million Estimated shortfall: approximately US$158.5 million
This shortfall represents the incremental charge that TMC would need to recognize in its financial statements to bring the environmental remediation reserve to an adequate level on an undiscounted basis. In Canadian dollar terms, the shortfall would be approximately C$214.4 million (US$158.5 million ÷ 0.7394).
C. Reserve Shortfall — NPV Basis (IFRS)
If the total obligation is accrued on a present-value basis, as required under IAS 37 for the long-duration remediation components, the reserve shortfall is calculated as follows:
Total NPV obligation: US$311.5 million Less: Existing reserve (US$ equivalent): US$251.4 million Estimated shortfall: approximately US$60.1 million
In Canadian dollar terms, the shortfall on an NPV basis would be approximately C$81.3 million (US$60.1 million ÷ 0.7394). This represents the incremental charge required under IFRS.
The significant difference between the nominal and NPV shortfall amounts (US$158.5 million versus US$60.1 million) underscores the materiality of the discounting methodology choice. Under IFRS, the lower initial accrual will be supplemented over time by annual accretion charges (unwinding of the discount) that will increase the provision as the remediation dates approach, such that over the full remediation period, the total expense recognized will approximate the nominal cost.
D. Insurance Recovery Offset
TMC holds an environmental pollution legal liability insurance policy ("PLL Policy") issued by Meridian Environmental Insurance Company (Policy No. MEI-ENV-2021-04738). The policy provides a per-occurrence limit of US$50.0 million and an aggregate limit of US$75.0 million, subject to a self-insured retention ("SIR") of US$5.0 million per occurrence.
TMC submitted claims under the PLL Policy for all four Consent Decree sites. Meridian's coverage position, as communicated in its reservation of rights letters dated April 3, 2024, and May 22, 2024, is as follows:
• Ridgecrest: Coverage denied. Meridian has invoked the known-conditions/prior-existing pollution exclusion, asserting that the contamination at Ridgecrest predated the policy inception date and was known to TMC at the time of policy placement.
• Kanawha Bend: Coverage denied. Meridian has invoked the late notice provision, asserting that TMC failed to provide timely notice of the December 2020 sulfuric acid release and that the delay materially prejudiced Meridian's rights.
• Gallatin Chemical Works: Coverage acknowledged, subject to the SIR and aggregate limit. Meridian has retained technical consultants to review Pinnacle Creek's cost estimates and may dispute the quantum of the claim.
• Bonanza Creek Gold Mine: Coverage acknowledged, subject to the SIR and aggregate limit. Meridian has similarly retained consultants to review the remediation cost estimates.
TMC has engaged coverage counsel (Whitfield, Palmer & Goss LLP, who continue to represent TMC in the insurance recovery matter) to dispute Meridian's coverage denials for Ridgecrest and Kanawha Bend. The outcome of the coverage dispute is uncertain, and Calderwood & Harkness is not in a position to opine on the probability of a favorable resolution.
Maximum theoretical recovery: The aggregate policy limit of US$75.0 million represents the maximum amount that TMC could recover under the PLL Policy, regardless of the number of covered occurrences.
Estimated realistic recovery: Northspire Capital Markets has estimated the realistic recovery at US$45.0 to US$55.0 million, reflecting the likelihood that coverage for Gallatin and Bonanza Creek will be confirmed (subject to SIR deductions and quantum disputes) and the possibility that some portion of the Ridgecrest and Kanawha Bend claims may be resolved through negotiation or litigation.
Accounting treatment of insurance recoveries:
Under ASC 450-30, insurance recoveries related to recognized loss contingencies should be recognized as an asset when recovery is "probable." Under IAS 37.53, reimbursement rights are recognized as a separate asset only when recovery is "virtually certain." Under both frameworks, the insurance receivable is presented as a separate asset on the balance sheet and is not netted against the environmental remediation liability. Under IAS 37, the income statement may present the expense net of the expected reimbursement, but the balance sheet must show the gross liability and the separate receivable asset.
Given the coverage dispute on Ridgecrest and Kanawha Bend, only the Gallatin and Bonanza Creek coverage can be treated as probable (ASC 450) or virtually certain (IAS 37). The potential claim for these two sites is calculated as follows:
Gallatin remediation cost: US$42.8 million Bonanza Creek remediation cost: US$63.2 million Combined: US$106.0 million Less: SIR of US$5.0 million per occurrence (× 2 occurrences): US$(10.0 million) Subtotal: US$96.0 million Capped at aggregate policy limit: US$75.0 million
Even on the covered claims alone, the aggregate policy limit of US$75.0 million would be reached. However, Northspire's realistic recovery estimate of US$45.0 to US$55.0 million reflects the possibility that Meridian may dispute the quantum of the Gallatin and Bonanza Creek claims and that the coverage dispute on Ridgecrest and Kanawha Bend may reduce the aggregate recovery below the policy limit. For purposes of establishing a conservative accrual, we recommend recognizing an insurance receivable at the low end of the estimated recovery range: US$45.0 million.
To be clear, the US$45.0 million insurance receivable does not reduce the environmental liability on TMC's balance sheet. It is a separate line item — an asset representing TMC's right to reimbursement from Meridian. The environmental remediation liability is presented gross of any expected insurance recovery.
E. Recommended Reserve Adjustment
Based on the analysis set forth in this memorandum, we recommend that TMC adjust its environmental remediation reserve as follows:
IFRS Basis (Primary Financial Statements):
The total IFRS-basis provision should be increased to reflect the NPV of the total Consent Decree obligations. The target reserve level is approximately US$311.5 million, or approximately C$421.3 million (US$311.5 million ÷ 0.7394). As the current reserve is C$340.0 million, the required incremental increase is approximately C$81.3 million (C$421.3 million minus C$340.0 million). This incremental charge would be recognized in the income statement as an environmental remediation expense, with the exception of the civil penalty component (US$31.5 million), which would be classified separately as a penalty expense.
U.S. GAAP Basis (Form 20-F Reconciliation):
If the environmental remediation obligation is accrued on an undiscounted basis under U.S. GAAP, the target reserve level would be approximately US$409.9 million, or approximately C$554.4 million (US$409.9 million ÷ 0.7394). The required incremental increase would be approximately C$214.4 million (C$554.4 million minus C$340.0 million).
Practical Recommendations:
We recommend that TMC's management, in consultation with the CFO and General Counsel, schedule an urgent meeting with Ridgeline Accounting Partners LLP (Frances Whitmore) to discuss the following:
1. Whether the existing reserve of C$340.0 million is measured on a discounted or undiscounted basis, and whether the current reserve already reflects any portion of the Consent Decree obligations beyond remediation (e.g., penalties, SEPs);
2. The appropriate discount rate for IFRS purposes, including validation of the 3% rate used in Pinnacle Creek's estimates;
3. The timing of the reserve adjustment — specifically, whether the adjustment should be recorded in the Q4 2024 interim financial statements or deferred to the annual financial statements for the year ending December 31, 2024;
4. The presentation of the insurance receivable as a separate asset; and
5. The disclosure language required under IAS 37 and SEC Regulation S-K.
The reserve adjustment will need to be reflected in TMC's annual financial statements for the fiscal year ending December 31, 2024. Depending on the timing of the adjustment and the materiality of the charge, it may also trigger interim reporting obligations under Canadian securities regulations (material change reporting) and SEC rules (Form 6-K).
VI. Financial Assurance Obligations — Accounting Treatment
The Consent Decree requires TMC to establish and maintain financial assurance in the aggregate amount of US$245.0 million to guarantee the performance of its remediation obligations. The financial assurance is structured through two instruments:
1. Surety Bond
TMC has arranged for the issuance of a surety bond in the amount of US$165.0 million by Ironbark Surety of America, Inc. (Bond No. ISA-ENV-2025-08934). The annual premium for the bond is 1.85% of the face amount, equating to US$3.0525 million per year. The bond will be issued upon entry of the Consent Decree and maintained throughout the remediation period.
Accounting treatment: The surety bond itself is not a liability on TMC's balance sheet, because it represents a contingent obligation of the surety (Ironbark) rather than a direct obligation of TMC. The annual premium payments of US$3.0525 million are recognized as an insurance expense in the period to which they relate. However, TMC's indemnity agreement with Ironbark — under which TMC has agreed to reimburse and hold harmless Ironbark for any amounts paid by Ironbark under the bond — creates a contingent obligation on the part of TMC. This contingent obligation should be disclosed in the notes to the financial statements as a guarantee, in accordance with ASC 460 (Guarantees) and IAS 37. The maximum potential exposure under the indemnity agreement is equal to the face amount of the bond (US$165.0 million), although TMC's actual exposure would arise only in the event that Ironbark is required to pay out under the bond and TMC fails to perform its remediation obligations — a scenario that overlaps with the existing accrued environmental remediation liability.
2. Remediation Trust Fund
TMC is required to establish and fund a remediation trust fund in the amount of US$80.0 million, to be held by Larchfield Trust Company, N.A. (Trust Agreement No. LTC-REM-2025-1177). The initial deposit of US$80.0 million is due within 90 days of the Effective Date of the Consent Decree. The trust fund will be used exclusively to fund remediation activities at the four Consent Decree sites, with disbursements authorized by the independent monitor and the EPA project coordinators.
Accounting treatment: The US$80.0 million initial deposit to the remediation trust fund is a transfer of cash from TMC's unrestricted accounts to a restricted-use trust account. At the time of funding, the deposit is classified as restricted cash (or a restricted asset) on TMC's balance sheet, not as an expense. The cash remains an asset of TMC — it is merely restricted as to its use — until it is actually disbursed for remediation activities. As disbursements are made from the trust to pay for remediation work, TMC records the expenditure and simultaneously reduces both the restricted cash asset and the environmental remediation liability. This treatment ensures that the environmental remediation liability on the balance sheet reflects the total remaining obligation, and the restricted cash reflects the funds set aside to fulfill a portion of that obligation. The trust fund balance should be classified as a non-current asset to the extent that disbursements are not expected within the next twelve months.
Disclosure: Both financial assurance instruments require footnote disclosure regarding the nature of the instrument, its terms, the restrictions on use of the trust fund assets, and the maximum exposure under the surety bond indemnity agreement. The disclosure shoul