1039-00003 · Torchlight Mining Corp · Accounting & Disclosure

sec-disclosure-analysis-20f.docx DOCUMENT Antitrust

4 / 75 ← → ✕

MEMORANDUM

PRIVILEGED AND CONFIDENTIAL ATTORNEY-CLIENT PRIVILEGE ATTORNEY WORK PRODUCT

March 10, 2025

TO: Miriam Soo-Hwan Park, General Counsel, Torchlight Mining Corp. Carolyn Bracebridge, Chief Financial Officer, Torchlight Mining Corp.

FROM: Harrison Wexford, Responsible Partner, Calderwood & Harkness LLP Elliot Nguyen, Lead Associate, Calderwood & Harkness LLP Grace Nakamura, Working Associate, Calderwood & Harkness LLP

RE: SEC Disclosure Analysis — Required Updates to Form 20-F Environmental Risk Factor Disclosures and Legal Proceedings Section in Light of Consent Decree (Civil Action No. 9:24-cv-00087-DWM)

MATTER NO.: 1039-00003

COPIES: Douglas K. Prennell (CEO, TMC); Gareth Linford (VP, EHS, TMC); Beatrice Holloway (Billing Partner, C&H); Frances Whitmore, CPA, CA (Engagement Partner, Ridgeline Accounting Partners LLP) — via separate cover

Right-click to update Table of Contents

I. EXECUTIVE SUMMARY

This memorandum analyzes the required updates to the annual report on Form 20-F filed by Torchlight Mining Corp. ("TMC" or the "Company") with the U.S. Securities and Exchange Commission (the "SEC"), arising from the consent decree (the "Consent Decree") lodged on February 19, 2025, in United States of America and State of Montana v. Torchlight Mining Corp. et al., Civil Action No. 9:24-cv-00087-DWM, U.S. District Court for the District of Montana, Missoula Division (Hon. Donald W. Molloy, Senior U.S. District Judge). The States of Nevada and West Virginia are consolidated co-plaintiffs.

TMC is a corporation organized under the Canada Business Corporations Act ("CBCA") and is dual-listed on the Toronto Stock Exchange ("TSX") under the symbol TRC and on the New York Stock Exchange ("NYSE") under the symbol TRC. As a foreign private issuer under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), TMC files its annual report on Form 20-F with the SEC.

The Consent Decree encompasses four sites across Montana, Nevada, and West Virginia, involving alleged violations of the Clean Water Act ("CWA"), the Resource Conservation and Recovery Act ("RCRA"), and the Comprehensive Environmental Response, Compensation, and Liability Act ("CERCLA"), as well as the Migratory Bird Treaty Act ("MBTA"). The grand total estimated obligation under the Consent Decree is approximately $409.9 million on a nominal basis and approximately $311.5 million on a net present value ("NPV") / cash equivalent basis (using a 3% discount rate). The obligation encompasses remediation costs ($343.5 million nominal), civil penalties ($31.5 million), EPA past-costs reimbursement ($18.1 million), supplemental environmental projects ($12.0 million), and independent environmental monitoring costs ($4.8 million estimated).

This memorandum addresses the following topics:

(a) Materiality Assessment — whether the Consent Decree and associated obligations are material to TMC for purposes of SEC disclosure;

(b) Risk Factor Updates — required additions and modifications to Item 3.D (Risk Factors) of the Form 20-F;

(c) Legal Proceedings Disclosures — required disclosures under Item 8.A.7 (Legal Proceedings) of the Form 20-F, as informed by Regulation S-K Item 103;

(d) Financial Statement Footnote Cross-References — coordination with the environmental contingency footnote in the financial statements and auditor communications;

(e) MD&A Considerations — required disclosures in Item 5 (Operating and Financial Review and Prospects) of the Form 20-F regarding liquidity, capital resources, and critical accounting estimates; and

(f) Recommended Disclosure Language — draft text for each of the foregoing sections for TMC management review.

As context, TMC's current environmental reserve as of Q3 2024 is C$340.0 million, which is approximately US$251.4 million at the prevailing exchange rate of C$1 = US$0.7394. The shortfall between the current reserve and the nominal obligation under the Consent Decree is approximately US$158.5 million, and the reserve will need to be increased materially before inclusion in the FY2024 year-end financial statements.

With respect to timing, the target date for entry of the Consent Decree by the Court is May 15, 2025, with an Effective Date of June 14, 2025 (30 days after entry, per Section IV of the Consent Decree). The 30-day public comment period closed on March 21, 2025, and the U.S. Department of Justice ("DOJ") filed its motion for entry of the Consent Decree on April 7, 2025. The Court has scheduled a hearing on the motion for April 28, 2025.

Our conclusion is unequivocal: the Consent Decree and all related obligations are material under any applicable quantitative or qualitative test and must be disclosed comprehensively in the Company's Form 20-F and related filings. Failure to make adequate disclosure would expose TMC to significant risk of SEC enforcement and private securities litigation. We set forth below the basis for this conclusion, together with detailed recommended disclosure language.

II. BACKGROUND

A. Torchlight Mining Corp. — Corporate Overview

Torchlight Mining Corp. is a corporation organized under the CBCA with its principal executive offices located at 1800 Bayfield Tower, 401 Bay Street, Toronto, Ontario M5H 2Y4, Canada. The Company maintains U.S. headquarters at 750 Copper Ridge Boulevard, Suite 200, Helena, Montana 59601. TMC is dual-listed on the TSX and the NYSE, trading under the symbol TRC on both exchanges.

For fiscal year 2023, TMC reported consolidated revenue of C$4.82 billion (approximately US$3.56 billion), EBITDA of C$1.14 billion (approximately US$843 million), and maintained a market capitalization of approximately C$7.6 billion as of October 2024 (approximately US$5.62 billion at prevailing exchange rates). The Company employs approximately 11,400 people worldwide, of whom approximately 4,200 are employed in the United States.

TMC is a diversified mining and specialty chemicals company. Its mining operations encompass copper, molybdenum, and gold extraction, while its specialty chemicals division manufactures flotation reagents, leaching agents, and related products used in the mining and metals processing industries. The Company operates 14 mines and 6 chemical processing facilities across North America, South America, and Australia. TMC's U.S. operations are conducted primarily through wholly owned subsidiaries, including Torchlight Mining (U.S.) Inc. (a Delaware corporation), Torchlight Specialty Chemicals, Inc. (a Delaware corporation), Ridgecrest Mine Holdings, LLC (a Montana limited liability company), and Bonanza Creek Mining, LLC (a Nevada limited liability company), each of which is a named defendant in the enforcement action discussed below.

B. The Enforcement Action and Consent Decree

On January 18, 2024, the DOJ, acting through its Environment and Natural Resources Division, Environmental Enforcement Section, on behalf of the U.S. Environmental Protection Agency ("EPA"), filed a complaint against TMC and its U.S. subsidiaries in the U.S. District Court for the District of Montana, Missoula Division, captioned United States of America and State of Montana v. Torchlight Mining Corp. et al., Civil Action No. 9:24-cv-00087-DWM (the "Enforcement Action"). The complaint alleged violations of the CWA, RCRA, and CERCLA at four sites in Montana, Nevada, and West Virginia, and sought injunctive relief, civil penalties, cost recovery, and the imposition of remediation obligations. The States of Nevada and West Virginia subsequently intervened as co-plaintiffs.

TMC filed its answer on March 5, 2024. On April 22, 2024, the parties entered into a tolling agreement tolling any applicable statutes of limitations through December 31, 2025, to facilitate settlement negotiations. On May 15, 2024, the Court ordered the parties to mediation before Magistrate Judge Clara Finnegan. The mediation was conducted over several sessions during the summer of 2024, and the parties reached an agreement in principle on a consent-decree framework on July 30, 2024.

Calderwood & Harkness LLP was engaged by TMC on October 21, 2024, to serve as lead outside counsel for the Consent Decree finalization and related disclosure matters, replacing Whitfield, Palmer & Goss LLP, which had represented TMC during the earlier litigation and mediation phases. We note that the change of counsel does not reflect any disagreement with prior counsel's strategy; rather, TMC desired specialized securities disclosure expertise in connection with the Form 20-F analysis that is the subject of this memorandum.

The Consent Decree was substantially finalized on February 3, 2025, and the execution version was lodged with the Court on February 19, 2025. Under the procedures set forth in 28 C.F.R. § 50.7, the DOJ published notice of the lodging in the Federal Register and invited public comment for a period of 30 days. The public comment period ran from February 19 through March 21, 2025. DOJ received and reviewed all comments submitted during this period and, having determined that no modifications to the Consent Decree were warranted, filed its motion for entry of the Consent Decree on April 7, 2025. The Court has set a hearing on the motion for April 28, 2025. Based on the procedural history and the absence of significant opposition, we expect the Court to enter the Consent Decree on or about May 15, 2025. Under Section IV of the Consent Decree, the "Effective Date" is defined as 30 days after the date of entry, which would place the Effective Date at approximately June 14, 2025.

C. Named Defendants

The following entities are named defendants in the Enforcement Action and are parties to the Consent Decree:

1. Torchlight Mining Corp. — the parent company, organized under the CBCA.

2. Torchlight Mining (U.S.) Inc. — a corporation organized under the laws of the State of Delaware; EIN: 83-2047156; the principal U.S. operating subsidiary of TMC.

3. Torchlight Specialty Chemicals, Inc. — a corporation organized under the laws of the State of Delaware; EIN: 47-3819204; the specialty chemicals operating subsidiary.

4. Ridgecrest Mine Holdings, LLC — a limited liability company organized under the laws of the State of Montana; Montana Secretary of State ID: E1042738; the entity that owns and has historically operated the Ridgecrest Copper-Molybdenum Mine.

5. Bonanza Creek Mining, LLC — a limited liability company organized under the laws of the State of Nevada; Nevada Secretary of State Entity No.: E0518294731; the entity that owns and operates the Bonanza Creek Gold Mine.

The plaintiffs are the United States of America, acting through the EPA and the DOJ, and, as co-plaintiffs, the State of Montana (through the Montana Department of Environmental Quality), the State of Nevada (through the Nevada Division of Environmental Protection), and the State of West Virginia (through the West Virginia Department of Environmental Protection).

D. The Four Sites

The Consent Decree encompasses four separate facilities, each of which has distinct environmental issues and remediation requirements:

1. Ridgecrest Copper-Molybdenum Mine

The Ridgecrest Copper-Molybdenum Mine (the "Ridgecrest Mine" or "Ridgecrest") is located at 14200 Ridgecrest Mine Road, Drummond, Granite County, Montana 59832. The mine footprint covers approximately 3,200 acres within a total controlled area of approximately 8,700 acres. Ridgecrest is an open-pit copper and molybdenum mine that 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 is the subject of an existing Administrative Order on Consent, Docket No. CERCLA-08-2022-0039, issued by EPA Region 8. Ridgecrest is the largest and most complex of the four sites and carries the most significant remediation obligations under the Consent Decree.

2. Gallatin Chemical Works

The Gallatin Chemical Works (the "Gallatin Facility" or "Gallatin") is located at 8800 Industrial Park Lane, Belgrade, Gallatin County, Montana 59714. The facility occupies approximately 145 acres and has been engaged in specialty chemical manufacturing since 1993. The facility is currently active and operates under RCRA Permit No. MTD098712456 issued by the Montana Department of Environmental Quality. The Gallatin Facility manufactures flotation reagents and other specialty chemicals used in mining operations.

3. Bonanza Creek Gold Mine

The Bonanza Creek Gold Mine (the "Bonanza Creek Mine" or "Bonanza Creek") is located on County Road 447 at Mile Marker 12, Lander County, Nevada 89820. The mine footprint covers approximately 5,600 acres within a total controlled area of approximately 12,400 acres. Bonanza Creek is an open-pit heap-leach gold mine that has been in operation since 2001 and is currently active. The mine produces gold through cyanide heap-leach processing and has experienced several environmental incidents involving process solution releases and avian mortalities at solution ponds.

4. Kanawha Bend Chemical Plant

The Kanawha Bend Chemical Plant (the "Kanawha Bend Facility" or "Kanawha Bend") is located at 2200 Chemical Valley Road, Institute, Kanawha County, West Virginia 25112. The facility occupies approximately 78 acres and has been engaged in chemical manufacturing since 1985. The facility is currently active and operates under RCRA Permit No. WVD048823915 issued by the West Virginia Department of Environmental Protection. The Kanawha Bend Facility produces leaching agents and other industrial chemicals.

E. Summary of Alleged Violations

The Enforcement Action alleges violations under multiple federal environmental statutes at each of the four sites. The following is a summary of the principal allegations:

1. Clean Water Act Section 301 — Unpermitted Discharges

Ridgecrest Mine: The complaint alleges that acid mine drainage ("AMD") from the Ridgecrest Mine has been discharged to Flint Creek without authorization under a National Pollutant Discharge Elimination System ("NPDES") permit. The Bramwell Group elevated concentrations of copper, with an average measured concentration of 47 mg/L compared to the applicable aquatic life water quality standard of 0.0087 mg/L — a ratio of more than 5,400:1. The discharges are alleged to have caused significant ecological harm to Flint Creek and its tributaries.

Gallatin Facility: The complaint identifies 14 exceedances of the facility's Montana Pollutant Discharge Elimination System ("MPDES") permit for carbon disulfide ("CS₂") and total suspended solids ("TSS") during the period from January 2021 through June 2024. These exceedances are alleged to constitute violations of CWA § 301 as discharges not in compliance with the facility's permit conditions.

Bonanza Creek Mine: The complaint alleges three heap-leach pad releases at the Bonanza Creek Mine occurring in March 2022, August 2022, and January 2023. The releases resulted in discharges to waters of the United States containing weak acid dissociable ("WAD") cyanide at concentrations of 0.62 mg/L (compared to the applicable water quality criterion of 0.022 mg/L) and mercury at 12.4 µg/L (compared to the applicable criterion of 0.77 µg/L).

2. RCRA Sections 3004 and 3005 — Hazardous Waste Mismanagement

Ridgecrest Mine: Mismanagement of hazardous waste generated from the solvent extraction-electrowinning ("SX-EW") circuit at the mine, including failure to properly characterize, label, and store spent solvent and circuit bleed solutions.

Gallatin Facility: Unpermitted storage of hazardous waste at three solid waste management units ("SWMUs") at the facility, in violation of RCRA permit conditions.

Bonanza Creek Mine: Improper management of spent heap-leach ore, which EPA contends constitutes a hazardous waste requiring management in accordance with RCRA Subtitle C requirements.

Kanawha Bend Facility: Unpermitted treatment of listed hazardous wastes, specifically K062 (spent pickle liquor from steel finishing) and D002 (corrosive characteristic waste), at the facility without the required RCRA treatment permit.

3. CERCLA Section 107 — Cost Recovery

The United States seeks reimbursement of EPA response costs totaling $18.1 million, consisting of $14.3 million for removal actions conducted at the Ridgecrest Mine between 2021 and 2023, and $3.8 million for emergency response costs incurred in connection with a June 14, 2020 sulfuric acid release at the Kanawha Bend Facility.

4. Migratory Bird Treaty Act

The complaint alleges 17 avian mortalities at the Bonanza Creek Mine solution ponds during the period from 2021 through 2023, in violation of the MBTA. The mortalities involved migratory birds that came into contact with cyanide-bearing process solutions in the mine's heap-leach solution collection ponds.

III. APPLICABLE SEC DISCLOSURE REQUIREMENTS

A. Form 20-F Disclosure Framework for Foreign Private Issuers

TMC files its annual report on Form 20-F with the SEC pursuant to Section 13(a) of the Exchange Act and the rules and regulations promulgated thereunder. Form 20-F is the annual reporting form prescribed for foreign private issuers, and its disclosure requirements are, in many respects, analogous to — though not identical with — those applicable to domestic issuers filing on Form 10-K under Regulation S-K.

In light of the Consent Decree and the associated financial obligations, the following sections of the Form 20-F require substantive updates for the FY2024 filing:

Item 3.D — Risk Factors. Item 3.D requires the Company to provide a description of the material risks to which it is exposed. This is the Form 20-F analogue to the risk factor disclosure required by Regulation S-K Item 105 for domestic issuers. TMC's existing risk factor disclosures address environmental and regulatory risks in general terms, but do not reflect the specific, quantified obligations arising from the Consent Decree.

Item 4.B — Business Overview. Item 4.B requires a description of the material aspects of the Company's business, including the regulatory environment in which it operates. TMC's environmental regulation discussion should be updated to reflect the Consent Decree and the enhanced compliance requirements it imposes on the Company's active facilities.

Item 8.A.7 — Legal Proceedings. Item 8.A.7 requires disclosure of legal proceedings in accordance with Regulation S-K Item 103. As discussed in detail below, the Consent Decree clearly triggers the disclosure thresholds applicable to environmental proceedings involving governmental parties.

Item 5 — Operating and Financial Review and Prospects (MD&A). Item 5 requires a discussion of the Company's financial condition, results of operations, liquidity, and capital resources, including known trends, commitments, events, or uncertainties that are reasonably likely to have a material effect. The Consent Decree creates significant known commitments that must be addressed in this section.

In addition, the Company's financial statements included in the Form 20-F must contain appropriate footnote disclosures regarding environmental contingencies and remediation obligations. These footnote disclosures must be cross-referenced from the narrative disclosure sections identified above.

B. Item 3.D — Risk Factors

The SEC's risk factor disclosure requirements, as articulated in Regulation S-K Item 105 (which is incorporated by reference into Form 20-F), require an issuer to disclose the material factors that make an investment in the issuer speculative or risky. The Commission's guidance emphasizes that risk factors should be specific to the issuer and should not be merely generic warnings. Risk factors should describe how the risk affects the issuer or its securities, and, where possible, should be quantified.

The Consent Decree and its associated obligations constitute a material risk to TMC's business, financial condition, results of operations, and cash flows. The $409.9 million grand total nominal obligation represents approximately 11.5% of TMC's FY2023 revenue (US$3.56 billion) and approximately 48.6% of TMC's FY2023 EBITDA (US$843 million). By any measure, obligations of this magnitude are material and must be prominently disclosed in the Company's risk factors.

The risk factor disclosures should address, at a minimum, the following topics:

(i) The scope and nature of the remediation obligations, including the uncertainty inherent in cost estimates spanning a 30-year horizon and the risk that actual costs may exceed current estimates due to unforeseen subsurface conditions, changes in regulatory requirements, or modifications to the remedy;

(ii) The ongoing regulatory compliance risks at the Company's active facilities (Gallatin, Bonanza Creek, and Kanawha Bend), including the enhanced compliance and monitoring requirements imposed by the Consent Decree;

(iii) The stipulated penalty provisions, which create an ongoing contingent financial exposure at rates of $1,500 per day per violation for the first 30 days, increasing to $3,000 per day for days 31 through 60, and further increasing to $5,500 per day thereafter;

(iv) The financial assurance obligations totaling $245.0 million, consisting of a $165.0 million surety bond and an $80.0 million remediation trust fund, and the impact of these obligations on the Company's financial flexibility and liquidity;

(v) The insurance coverage dispute with Meridian Environmental Insurance Company ("Meridian"), which has denied coverage for two of the four sites and the resulting risk that TMC may be required to bear a larger share of costs than currently anticipated; and

(vi) The potential impact on the Company's credit facility covenants, including the environmental liability covenant under the Company's C$750.0 million revolving credit facility with Harborstone National Bank, N.A.

C. Item 8.A.7 — Legal Proceedings

Item 8.A.7 of Form 20-F requires disclosure of legal proceedings in accordance with the instructions set forth in Regulation S-K Item 103. The general instruction is to describe briefly any material pending legal proceedings, other than ordinary routine litigation incidental to the business, to which the registrant or any of its subsidiaries is a party.

With respect to environmental proceedings specifically, Regulation S-K Item 103(c)(3) provides that an issuer must disclose any proceeding arising under any federal, state, or local provisions regulating the discharge of materials into the environment or primarily for the purpose of protecting the environment, if:

(a) The proceeding is material to the business or financial condition of the issuer;

(b) The proceeding involves potential monetary sanctions, and a governmental authority is a party to the proceeding, and the potential monetary sanctions exceed $300,000 (or such other threshold as the issuer may have elected to use, not to exceed $1,000,000); or

(c) The proceeding involves potential monetary sanctions exceeding a threshold that the issuer has determined to be material and has disclosed in its filings.

The Consent Decree clearly and unambiguously exceeds all applicable disclosure thresholds. The civil penalty alone is $31.5 million — more than 100 times the $300,000 threshold. The aggregate remediation obligation of $343.5 million is material by any conceivable standard. The grand total estimated obligation of $409.9 million is substantial in both absolute terms and relative to TMC's financial metrics. Moreover, the United States, acting through the EPA and the DOJ, is a party to the proceeding, and three state governments are co-plaintiffs. Accordingly, full disclosure under Item 8.A.7 is mandatory.

The legal proceedings disclosure must include: the case caption, the court in which the proceeding is pending, the nature of the proceeding, a description of the relief sought, the current status of the proceeding, and, if known, the amount of any penalty or obligation imposed. Given that the Consent Decree terms are public (having been lodged with the Court), TMC should disclose the specific financial terms of the settlement in appropriate detail.

D. Item 5 — Operating and Financial Review and Prospects (MD&A)

Item 5 of Form 20-F requires a discussion of the Company's operating results and financial condition from management's perspective. The MD&A requirements are modeled on Regulation S-K Item 303 and require disclosure of "known trends or known demands, commitments, events or uncertainties" that will result in or are "reasonably likely to result in" the registrant's liquidity increasing or decreasing in any material way.

The Consent Decree creates a series of known financial commitments extending over a period of up to 30 years. These commitments will have a direct impact on TMC's liquidity and capital resources and must be discussed in the MD&A section. Specific commitments requiring disclosure include:

• Civil penalty payment schedule: Four quarterly installments of $7.875 million each, with the first installment due 30 days after the Effective Date (approximately July 14, 2025) and subsequent installments at 12, 24, and 36 months after entry of the Consent Decree.

• Remediation trust fund deposit: An initial deposit of $80.0 million into a remediation trust fund with Larchfield Trust Company, N.A., due within 90 days of the Effective Date (approximately September 12, 2025).

• Surety bond premiums: An annual premium of $3.0525 million for the $165.0 million surety bond issued by Ironbark Surety of America, Inc.

• EPA past-costs reimbursement: A lump sum payment of $18.1 million.

• Supplemental environmental project expenditures: $12.0 million across three SEPs.

• Independent monitor costs: Estimated at approximately $960,000 per year for a minimum of 5 years, totaling approximately $4.8 million.

• Remediation expenditures: Variable by year, commencing with remedial action work plan development and ramping up to remedy construction at the Ridgecrest Mine beginning June 14, 2027.

The MD&A must also discuss the impact of these commitments on the Company's credit facility, the potential for insurance recoveries, and the uncertainty surrounding the timing and amount of remediation expenditures.

E. Financial Statement Footnote Requirements

The financial statements included in the Form 20-F must contain appropriate footnote disclosures regarding environmental contingencies and remediation obligations. The applicable accounting standards are ASC 450 (Contingencies) under U.S. GAAP and IAS 37 (Provisions, Contingent Liabilities and Contingent Assets) under IFRS. Because TMC reports under IFRS (as adopted by the International Accounting Standards Board), IAS 37 is the primary applicable standard, although ASC 450 provides useful supplementary guidance given the SEC filing context.

As previously noted, a separate draft financial statement footnote was prepared on February 28, 2025, and provided to Ridgeline Accounting Partners LLP for review. That footnote addresses the nature and scope of the environmental obligations, the best estimate and range of remediation costs, the payment schedule, financial assurance arrangements, insurance coverage disputes, estimated recoveries, and the contingent exposure for stipulated penalties.

TMC's current environmental reserve stands at C$340.0 million (approximately US$251.4 million) as of Q3 2024. The Consent Decree establishes a nominal obligation of approximately US$409.9 million, resulting in a material shortfall of approximately US$158.5 million. This shortfall must be addressed before the FY2024 year-end financial statements are finalized. Coordination with Ridgeline Accounting Partners LLP on the reserve adequacy assessment is ongoing; we responded to the auditor's inquiry letter on March 3, 2025 (via a separate letter addressed to Frances Whitmore, CPA, CA, Engagement Partner, Ridgeline Accounting Partners LLP).

Under IAS 37, a provision must be recognized when (a) an entity has a present obligation as a result of a past event, (b) it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation, and (c) a reliable estimate can be made of the amount of the obligation. The provision should be measured at the best estimate of the expenditure required to settle the present obligation. Where there is a range of equally likely outcomes, IAS 37 requires use of the mid-point of the range. Under ASC 450, when a loss is probable and a range of loss can be estimated but no amount within the range is a better estimate than any other, the minimum of the range should be accrued. Given the specificity of the negotiated Consent Decree amounts, the $409.9 million nominal figure represents a reasonable best estimate for disclosure purposes, although the Company should note the estimation uncertainty inherent in long-term remediation cost projections.

IV. MATERIALITY ASSESSMENT

A. Quantitative Materiality Analysis

The following table summarizes the quantitative materiality analysis for the Consent Decree obligations relative to TMC's key financial metrics:

Each of these ratios substantially exceeds commonly applied quantitative materiality thresholds. A charge equal to 48.6% of EBITDA is extraordinary by any standard. Similarly, an obligation representing 11.5% of revenue and 14.1% of CNTA is well beyond the 5% threshold often used as a general benchmark in the materiality literature, although we acknowledge that materiality is ultimately a facts-and-circumstances determination and cannot be reduced to any single bright-line percentage.

Moreover, each individual site obligation independently exceeds the $300,000 threshold specified in Regulation S-K Item 103(c)(3) for environmental proceedings disclosures involving governmental parties. The civil penalty alone ($31.5 million) is material in its own right. The remediation obligations ($343.5 million nominal / $245.1 million NPV) are clearly material as well. Accordingly, the aggregate obligation is material by any standard.

B. Qualitative Materiality Factors

Beyond the quantitative analysis, several qualitative factors reinforce the materiality determination:

Nature of the Proceeding. The Enforcement Action is a federal government enforcement action brought by the EPA and the DOJ, with three state governments as co-plaintiffs. Government enforcement actions carry significant reputational and regulatory risk beyond their direct financial impact. They may affect the Company's ability to obtain permits, maintain regulatory goodwill, and operate in affected jurisdictions. The involvement of multiple federal and state agencies across three states amplifies these concerns.

Duration of Obligations. The Consent Decree imposes remediation obligations spanning up to 30 years at the Ridgecrest Mine and 15 to 20 years at the other three sites. Obligations of this duration create sustained uncertainty regarding total costs and operational impacts. The extended time horizon increases the risk that actual costs will diverge materially from current estimates due to factors such as unforeseen subsurface contamination, changes in cleanup standards, inflation, and technological evolution.

Ongoing Operational Impact. Three of the four sites covered by the Consent Decree — Gallatin, Bonanza Creek, and Kanawha Bend — are currently active facilities. The Consent Decree imposes enhanced compliance requirements at each of these facilities, including independent environmental monitoring by a court-appointed monitor, Verdant Analytics, Inc. (Dr. Kamal Osei, Senior Environmental Scientist and Project Director). These requirements will affect day-to-day operations, may constrain production flexibility, and will require ongoing management attention and expenditure.

Insurance Coverage Uncertainty. TMC maintains a pollution legal liability ("PLL") policy with Meridian Environmental Insurance Company (Policy No. MEI-ENV-2021-04738), which has a per-occurrence limit of $50.0 million and an aggregate limit of $75.0 million, subject to a self-insured retention ("SIR") of $5.0 million per occurrence. However, Meridian has denied coverage for the Ridgecrest Mine (invoking the pollution/known-conditions exclusion) and the Kanawha Bend Facility (alleging late notice). Coverage has been acknowledged for the Gallatin and Bonanza Creek sites, subject to the SIR. The insurance coverage dispute creates significant uncertainty regarding the net cost to TMC. If coverage is not recovered for Ridgecrest and Kanawha Bend, the Company will bear the full cost of remediation at those sites without any insurance offset.

Stipulated Penalties. The Consent Decree includes stipulated penalty provisions that create ongoing contingent exposure. Stipulated penalties accrue at $1,500 per day per violation for the first 30 days of noncompliance, $3,000 per day per violation for days 31 through 60, and $5,500 per day per violation thereafter. For a multi-site consent decree involving numerous compliance milestones and operational requirements, the cumulative stipulated penalty exposure could become significant if compliance lapses occur.

D&O Implications. TMC has filed a notice of circumstances with its directors' and officers' liability insurer, Clearwater Mutual Insurance, Ltd. (Policy No. CMI-DO-2023-10221), in connection with the Enforcement Action. The potential for director and officer exposure adds an additional dimension to the materiality analysis, particularly in light of the securities disclosure issues discussed in this memorandum.

C. Materiality Conclusion

Based on the foregoing quantitative and qualitative analysis, we conclude without hesitation that the Consent Decree and all related obligations are unambiguously material to Torchlight Mining Corp. for purposes of SEC disclosure. The obligations must be disclosed in the risk factors, legal proceedings, MD&A, and financial statement footnotes of the Company's Form 20-F.

We further note that failure to make adequate disclosure would expose TMC and its officers to potential SEC enforcement action for violations of Section 13(a) of the Exchange Act and Rule 13a-1 thereunder, as well as private securities litigation under Section 10(b) of the Exchange Act and Rule 10b-5 promulgated thereunder. Given the magnitude of the obligations and the public nature of the Consent Decree (which is a matter of public record having been lodged with a federal court and noticed in the Federal Register), the risk of a securities fraud claim based on material omissions would be substantial and difficult to defend.

V. RECOMMENDED RISK FACTOR DISCLOSURE UPDATES

Based on our analysis, we recommend that TMC add or update the following risk factors in Item 3.D of its FY2024 Form 20-F. Draft disclosure language for each risk factor is provided in Section VIII below.

A. New or Updated Risk Factor: Environmental Remediation Obligations

We recommend that TMC include a new risk factor — or substantially update the existing environmental remediation risk factor — with the following recommended caption:

"We are subject to significant environmental remediation obligations under a consent decree with the U.S. EPA and DOJ that could materially affect our financial condition, results of operations, and cash flows."

This risk factor should describe, at a minimum, the following:

• The Enforcement Action and the four affected sites (Ridgecrest, Gallatin, Bonanza Creek, and Kanawha Bend), including the nature of the contamination and alleged violations at each site;

• The total nominal remediation obligation of $343.5 million, to be performed over periods ranging from 15 to 30 years;

• The civil penalties of $31.5 million, payable in quarterly installments over 36 months;

• The EPA past-costs reimbursement obligation of $18.1 million, consisting of $14.3 million for Ridgecrest removal actions and $3.8 million for Kanawha Bend emergency response;

• The supplemental environmental projects totaling $12.0 million, consisting of the Flint Creek Watershed Restoration ($5.5 million), the Battle Mountain Drinking Water project ($3.5 million), and the Institute Air Quality Monitoring project ($3.0 million);

• The independent environmental monitoring costs estimated at $4.8 million over 5 years;

• The grand total estimated obligation of approximately $409.9 million;

• The risk that actual costs may exceed estimates due to unforeseen subsurface conditions, changes in regulatory standards, inflation, or modifications to the remedy;

• A cross-reference to the financial assurance obligations ($245.0 million in surety bonds and remediation trust fund); and

• The stipulated penalty exposure for failure to meet compliance milestones.

B. New or Updated Risk Factor: Financial Assurance and Liquidity Impact

We recommend a separate risk factor addressing the financial assurance obligations under the Consent Decree, with the following recommended caption:

"Our obligation to maintain $245.0 million in financial assurance instruments may limit our financial flexibility and liquidity."

This risk factor should address:

• The surety bond requirement of $165.0 million, issued by Ironbark Surety of America, Inc. (Bond No. ISA-ENV-2025-08934), with an annual premium of $3.0525 million (1.85% of face value);

• The remediation trust fund deposit of $80.0 million with Larchfield Trust Company, N.A. (Trust Agreement No. LTC-REM-2025-1177);

• TMC's indemnification obligations under the surety bond agreement, which could expose the Company to additional liability in the event the surety is called upon to perform;

• The risk that the surety may not renew the bond at its current face value or premium rate, or may decline to renew altogether, which could require the Company to post alternative forms of financial assurance at potentially higher cost;

• The impact of these obligations on the Company's borrowing capacity and its ability to comply with covenants under the C$750.0 million revolving credit facility with Harborstone National Bank, N.A.; and

• The environmental liability covenant under the credit facility, which requires that aggregate environmental liabilities not exceed 25% of CNTA (currently a threshold of C$980.0 million, with current headroom of C$425.6 million).

C. New or Updated Risk Factor: Insurance Coverage Disputes

We recommend a risk factor addressing the insurance coverage dispute, with the following recommended caption:

"We are engaged in insurance coverage disputes that, if resolved unfavorably, could increase our net remediation costs."

This risk factor should describe:

• TMC's pollution legal liability policy with Meridian Environmental Insurance Company (Policy No. MEI-ENV-2021-04738), with a per-occurrence limit of $50.0 million, an aggregate limit of $75.0 million, and an SIR of $5.0 million per occurrence;

• Meridian's denial of coverage for the Ridgecrest Mine (based on the pollution/known-conditions exclusion) and the Kanawha Bend Facility (based on alleged late notice);

• Meridian's acknowledgment of coverage for the Gallatin and Bonanza Creek sites, subject to the SIR;

• The estimated recovery range of $45.0 million to $55.0 million (based on analysis by Northspire Capital Markets, Inc.), with a maximum theoretical recovery of $75.0 million if all disputes are resolved in TMC's favor; and

• The risk that if the coverage disputes are resolved unfavorably, TMC's unreimbursed remediation costs could increase significantly, and the Company may be required to bear the full cost of remediation at the Ridgecrest and Kanawha Bend sites without any insurance offset.

D. Existing Risk Factors Requiring Update

In addition to the new risk factors identified above, the following existing risk factors in TMC's Form 20-F should be reviewed and updated to reflect the Consent Decree:

Environmental Compliance Risk Factor. TMC's existing risk factor regarding environmental laws and regulations should be updated to reference the specific enhanced compliance requirements imposed by the Consent Decree at the Company's active facilities, including the independent monitoring program to be conducted by Verdant Analytics, Inc. The risk factor should note that failure to comply with these requirements could result in stipulated penalties, additional enforcement actions, or modifications to the Consent Decree.

Litigation and Legal Proceedings Risk Factor. TMC's existing risk factor regarding litigation and legal proceedings should be updated to reflect the resolution of the Enforcement Action through the Consent Decree, the pending court entry process, and the remaining procedural steps. The disclosure should make clear that while the Consent Decree represents a negotiated resolution of the Enforcement Action, the Company remains subject to ongoing obligations and potential penalties under its terms.

Credit Facility / Debt Covenant Risk Factor. TMC's existing risk factor regarding its credit facility should be updated to address the potential impact of the Consent Decree obligations on compliance with the environmental liability covenant under the Harborstone RCF, and the potential need for an amendment or waiver of the credit facility in the event that aggregate environmental liabilities approach or exceed the covenant threshold.

VI. RECOMMENDED LEGAL PROCEEDINGS DISCLOSURE (ITEM 8.A.7)

A. Case Description

The Item 8.A.7 legal proceedings disclosure should begin with a description of the Enforcement Action, including the full case caption, the court, the filing date, and the nature of the proceeding. The recommended approach is as follows:

The disclosure should identify the case as United States of America and State of Montana v. Torchlight Mining Corp., Torchlight Mining (U.S.) Inc., Torchlight Specialty Chemicals, Inc., Ridgecrest Mine Holdings, LLC, and Bonanza Creek Mining, LLC, with the States of Nevada and West Virginia consolidated as co-plaintiffs. The civil action number is 9:24-cv-00087-DWM. The case is pending in the U.S. District Court for the District of Montana, Missoula Division. The complaint was filed on January 18, 2024, by the DOJ, acting through its Environment and Natural Resources Division, Environmental Enforcement Section, on behalf of the EPA.

The nature of the proceeding should be described as a federal enforcement action alleging violations of CWA § 301, RCRA §§ 3004 and 3005, CERCLA § 107, and the MBTA at four facilities operated by TMC and its subsidiaries in the states of Montana, Nevada, and West Virginia.

B. Relief Sought and Settlement Terms

The disclosure should describe the terms of the Consent Decree in sufficient detail to inform investors of the nature and magnitude of the Company's obligations. The following categories of relief should be addressed:

Remediation Obligations: The Consent Decree requires TMC and its subsidiaries to perform environmental remediation at four sites at an aggregate estimated cost of $343.5 million on a nominal basis ($245.1 million on an NPV basis, using a 3% discount rate), over periods ranging from 15 years to 30 years.

Civil Penalties: TMC will pay civil penalties totaling $31.5 million, payable in four equal installments of $7.875 million each. The first installment is due 30 days after the Effective Date, with subsequent installments due at 12, 24, and 36 months after entry of the Consent Decree.

EPA Past-Costs Reimbursement: TMC will reimburse the EPA for past response costs totaling $18.1 million, consisting of $14.3 million for removal actions conducted at the Ridgecrest Mine between 2021 and 2023, and $3.8 million for emergency response costs incurred at the Kanawha Bend Facility in connection with a June 2020 sulfuric acid release. This amount is payable as a lump sum.

Supplemental Environmental Projects: TMC will fund three supplemental environmental projects totaling $12.0 million: the Flint Creek Watershed Restoration project ($5.5 million), the Battle Mountain Drinking Water project ($3.5 million), and the Institute Air Quality Monitoring project ($3.0 million).

Independent Environmental Monitoring: The Consent Decree provides for independent environmental monitoring by a court-appointed monitor, Verdant Analytics, Inc., for a minimum period of 5 years. TMC is responsible for the costs of the monitoring program, estimated at approximately $4.8 million.

Financial Assurance: TMC is required to maintain $245.0 million in financial assurance, consisting of a $165.0 million surety bond and an $80.0 million remediation trust fund.

Grand Total: The aggregate estimated financial obligation under the Consent Decree is approximately $409.9 million on a nominal basis.

C. Current Status

The disclosure should provide an up-to-date account of the procedural status of the Consent Decree, including:

• The Consent Decree was lodged with the Court on February 19, 2025;

• The 30-day public comment period, as required by 28 C.F.R. § 50.7, closed on March 21, 2025;

• The DOJ filed its motion for entry of the Consent Decree on April 7, 2025;

• The Court has scheduled a hearing on the motion for April 28, 2025;

• The Company expects the Court to enter the Consent Decree on or about May 15, 2025, with an Effective Date of approximately June 14, 2025 (30 days after entry, per Section IV of the Consent Decree).

D. Specific Site-by-Site Breakdown for Disclosure

To provide investors with a comprehensive understanding of the obligations, we recommend that the legal proceedings disclosure include a site-by-site breakdown of the financial obligations as follows:

The Bonanza Creek disclosure should also note that the Consent Decree addresses 17 avian mortalities at the mine's solution ponds during the period from 2021 through 2023, in connection with alleged violations of the MBTA.

VII. MD&A DISCLOSURE CONSIDERATIONS

A. Known Trends and Commitments

The Consent Decree creates a defined schedule of financial commitments extending up to 30 years, which must be discussed in the MD&A section of the Form 20-F as known commitments under Item 5. The discussion should address both near-term and long-term cash outflows.

Near-Term Cash Outflows (2025). The following significant cash outflows are expected within the first year following entry of the Consent Decree:

• Remediation trust fund deposit: $80.0 million, due within 90 days of the Effective Date (estimated deadline: September 12, 2025);

• First civil penalty installment: $7.875 million, due 30 days after the Effective Date (estimated: July 14, 2025);

• Surety bond premium: $3.0525 million per year, commencing upon issuance of the bond;

• EPA past-costs reimbursement: $18.1 million lump sum, due within 60 days of the Effective Date.

Civil Penalty Payment Schedule. The total civil penalty of $31.5 million is payable in four equal installments:

• $7.875 million at Effective Date + 30 days (approximately July 14, 2025);

• $7.875 million at 12 months after entry (approximately May 15, 2026);

MEMORANDUM
PRIVILEGED AND CONFIDENTIAL ATTORNEY-CLIENT PRIVILEGE ATTORNEY WORK PRODUCT
March 10, 2025
TO: Miriam Soo-Hwan Park, General Counsel, Torchlight Mining Corp. Carolyn Bracebridge, Chief Financial Officer, Torchlight Mining Corp.
FROM: Harrison Wexford, Responsible Partner, Calderwood & Harkness LLP Elliot Nguyen, Lead Associate, Calderwood & Harkness LLP Grace Nakamura, Working Associate, Calderwood & Harkness LLP
RE: SEC Disclosure Analysis — Required Updates to Form 20-F Environmental Risk Factor Disclosures and Legal Proceedings Section in Light of Consent Decree (Civil Action No. 9:24-cv-00087-DWM)
MATTER NO.: 1039-00003
COPIES: Douglas K. Prennell (CEO, TMC); Gareth Linford (VP, EHS, TMC); Beatrice Holloway (Billing Partner, C&H); Frances Whitmore, CPA, CA (Engagement Partner, Ridgeline Accounting Partners LLP) — via separate cover
Right-click to update Table of Contents
I. EXECUTIVE SUMMARY
This memorandum analyzes the required updates to the annual report on Form 20-F filed by Torchlight Mining Corp. ("TMC" or the "Company") with the U.S. Securities and Exchange Commission (the "SEC"), arising from the consent decree (the "Consent Decree") lodged on February 19, 2025, in United States of America and State of Montana v. Torchlight Mining Corp. et al., Civil Action No. 9:24-cv-00087-DWM, U.S. District Court for the District of Montana, Missoula Division (Hon. Donald W. Molloy, Senior U.S. District Judge). The States of Nevada and West Virginia are consolidated co-plaintiffs.
TMC is a corporation organized under the Canada Business Corporations Act ("CBCA") and is dual-listed on the Toronto Stock Exchange ("TSX") under the symbol TRC and on the New York Stock Exchange ("NYSE") under the symbol TRC. As a foreign private issuer under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), TMC files its annual report on Form 20-F with the SEC.
The Consent Decree encompasses four sites across Montana, Nevada, and West Virginia, involving alleged violations of the Clean Water Act ("CWA"), the Resource Conservation and Recovery Act ("RCRA"), and the Comprehensive Environmental Response, Compensation, and Liability Act ("CERCLA"), as well as the Migratory Bird Treaty Act ("MBTA"). The grand total estimated obligation under the Consent Decree is approximately $409.9 million on a nominal basis and approximately $311.5 million on a net present value ("NPV") / cash equivalent basis (using a 3% discount rate). The obligation encompasses remediation costs ($343.5 million nominal), civil penalties ($31.5 million), EPA past-costs reimbursement ($18.1 million), supplemental environmental projects ($12.0 million), and independent environmental monitoring costs ($4.8 million estimated).
This memorandum addresses the following topics:
(a) Materiality Assessment — whether the Consent Decree and associated obligations are material to TMC for purposes of SEC disclosure;
(b) Risk Factor Updates — required additions and modifications to Item 3.D (Risk Factors) of the Form 20-F;
(c) Legal Proceedings Disclosures — required disclosures under Item 8.A.7 (Legal Proceedings) of the Form 20-F, as informed by Regulation S-K Item 103;
(d) Financial Statement Footnote Cross-References — coordination with the environmental contingency footnote in the financial statements and auditor communications;
(e) MD&A Considerations — required disclosures in Item 5 (Operating and Financial Review and Prospects) of the Form 20-F regarding liquidity, capital resources, and critical accounting estimates; and
(f) Recommended Disclosure Language — draft text for each of the foregoing sections for TMC management review.
As context, TMC's current environmental reserve as of Q3 2024 is C$340.0 million, which is approximately US$251.4 million at the prevailing exchange rate of C$1 = US$0.7394. The shortfall between the current reserve and the nominal obligation under the Consent Decree is approximately US$158.5 million, and the reserve will need to be increased materially before inclusion in the FY2024 year-end financial statements.
With respect to timing, the target date for entry of the Consent Decree by the Court is May 15, 2025, with an Effective Date of June 14, 2025 (30 days after entry, per Section IV of the Consent Decree). The 30-day public comment period closed on March 21, 2025, and the U.S. Department of Justice ("DOJ") filed its motion for entry of the Consent Decree on April 7, 2025. The Court has scheduled a hearing on the motion for April 28, 2025.
Our conclusion is unequivocal: the Consent Decree and all related obligations are material under any applicable quantitative or qualitative test and must be disclosed comprehensively in the Company's Form 20-F and related filings. Failure to make adequate disclosure would expose TMC to significant risk of SEC enforcement and private securities litigation. We set forth below the basis for this conclusion, together with detailed recommended disclosure language.
II. BACKGROUND
A. Torchlight Mining Corp. — Corporate Overview
Torchlight Mining Corp. is a corporation organized under the CBCA with its principal executive offices located at 1800 Bayfield Tower, 401 Bay Street, Toronto, Ontario M5H 2Y4, Canada. The Company maintains U.S. headquarters at 750 Copper Ridge Boulevard, Suite 200, Helena, Montana 59601. TMC is dual-listed on the TSX and the NYSE, trading under the symbol TRC on both exchanges.
For fiscal year 2023, TMC reported consolidated revenue of C$4.82 billion (approximately US$3.56 billion), EBITDA of C$1.14 billion (approximately US$843 million), and maintained a market capitalization of approximately C$7.6 billion as of October 2024 (approximately US$5.62 billion at prevailing exchange rates). The Company employs approximately 11,400 people worldwide, of whom approximately 4,200 are employed in the United States.
TMC is a diversified mining and specialty chemicals company. Its mining operations encompass copper, molybdenum, and gold extraction, while its specialty chemicals division manufactures flotation reagents, leaching agents, and related products used in the mining and metals processing industries. The Company operates 14 mines and 6 chemical processing facilities across North America, South America, and Australia. TMC's U.S. operations are conducted primarily through wholly owned subsidiaries, including Torchlight Mining (U.S.) Inc. (a Delaware corporation), Torchlight Specialty Chemicals, Inc. (a Delaware corporation), Ridgecrest Mine Holdings, LLC (a Montana limited liability company), and Bonanza Creek Mining, LLC (a Nevada limited liability company), each of which is a named defendant in the enforcement action discussed below.
B. The Enforcement Action and Consent Decree
On January 18, 2024, the DOJ, acting through its Environment and Natural Resources Division, Environmental Enforcement Section, on behalf of the U.S. Environmental Protection Agency ("EPA"), filed a complaint against TMC and its U.S. subsidiaries in the U.S. District Court for the District of Montana, Missoula Division, captioned United States of America and State of Montana v. Torchlight Mining Corp. et al., Civil Action No. 9:24-cv-00087-DWM (the "Enforcement Action"). The complaint alleged violations of the CWA, RCRA, and CERCLA at four sites in Montana, Nevada, and West Virginia, and sought injunctive relief, civil penalties, cost recovery, and the imposition of remediation obligations. The States of Nevada and West Virginia subsequently intervened as co-plaintiffs.
TMC filed its answer on March 5, 2024. On April 22, 2024, the parties entered into a tolling agreement tolling any applicable statutes of limitations through December 31, 2025, to facilitate settlement negotiations. On May 15, 2024, the Court ordered the parties to mediation before Magistrate Judge Clara Finnegan. The mediation was conducted over several sessions during the summer of 2024, and the parties reached an agreement in principle on a consent-decree framework on July 30, 2024.
Calderwood & Harkness LLP was engaged by TMC on October 21, 2024, to serve as lead outside counsel for the Consent Decree finalization and related disclosure matters, replacing Whitfield, Palmer & Goss LLP, which had represented TMC during the earlier litigation and mediation phases. We note that the change of counsel does not reflect any disagreement with prior counsel's strategy; rather, TMC desired specialized securities disclosure expertise in connection with the Form 20-F analysis that is the subject of this memorandum.
The Consent Decree was substantially finalized on February 3, 2025, and the execution version was lodged with the Court on February 19, 2025. Under the procedures set forth in 28 C.F.R. § 50.7, the DOJ published notice of the lodging in the Federal Register and invited public comment for a period of 30 days. The public comment period ran from February 19 through March 21, 2025. DOJ received and reviewed all comments submitted during this period and, having determined that no modifications to the Consent Decree were warranted, filed its motion for entry of the Consent Decree on April 7, 2025. The Court has set a hearing on the motion for April 28, 2025. Based on the procedural history and the absence of significant opposition, we expect the Court to enter the Consent Decree on or about May 15, 2025. Under Section IV of the Consent Decree, the "Effective Date" is defined as 30 days after the date of entry, which would place the Effective Date at approximately June 14, 2025.
C. Named Defendants
The following entities are named defendants in the Enforcement Action and are parties to the Consent Decree:
1. Torchlight Mining Corp. — the parent company, organized under the CBCA.
2. Torchlight Mining (U.S.) Inc. — a corporation organized under the laws of the State of Delaware; EIN: 83-2047156; the principal U.S. operating subsidiary of TMC.
3. Torchlight Specialty Chemicals, Inc. — a corporation organized under the laws of the State of Delaware; EIN: 47-3819204; the specialty chemicals operating subsidiary.
4. Ridgecrest Mine Holdings, LLC — a limited liability company organized under the laws of the State of Montana; Montana Secretary of State ID: E1042738; the entity that owns and has historically operated the Ridgecrest Copper-Molybdenum Mine.
5. Bonanza Creek Mining, LLC — a limited liability company organized under the laws of the State of Nevada; Nevada Secretary of State Entity No.: E0518294731; the entity that owns and operates the Bonanza Creek Gold Mine.
The plaintiffs are the United States of America, acting through the EPA and the DOJ, and, as co-plaintiffs, the State of Montana (through the Montana Department of Environmental Quality), the State of Nevada (through the Nevada Division of Environmental Protection), and the State of West Virginia (through the West Virginia Department of Environmental Protection).
D. The Four Sites
The Consent Decree encompasses four separate facilities, each of which has distinct environmental issues and remediation requirements:
1. Ridgecrest Copper-Molybdenum Mine
The Ridgecrest Copper-Molybdenum Mine (the "Ridgecrest Mine" or "Ridgecrest") is located at 14200 Ridgecrest Mine Road, Drummond, Granite County, Montana 59832. The mine footprint covers approximately 3,200 acres within a total controlled area of approximately 8,700 acres. Ridgecrest is an open-pit copper and molybdenum mine that 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 is the subject of an existing Administrative Order on Consent, Docket No. CERCLA-08-2022-0039, issued by EPA Region 8. Ridgecrest is the largest and most complex of the four sites and carries the most significant remediation obligations under the Consent Decree.
2. Gallatin Chemical Works
The Gallatin Chemical Works (the "Gallatin Facility" or "Gallatin") is located at 8800 Industrial Park Lane, Belgrade, Gallatin County, Montana 59714. The facility occupies approximately 145 acres and has been engaged in specialty chemical manufacturing since 1993. The facility is currently active and operates under RCRA Permit No. MTD098712456 issued by the Montana Department of Environmental Quality. The Gallatin Facility manufactures flotation reagents and other specialty chemicals used in mining operations.
3. Bonanza Creek Gold Mine
The Bonanza Creek Gold Mine (the "Bonanza Creek Mine" or "Bonanza Creek") is located on County Road 447 at Mile Marker 12, Lander County, Nevada 89820. The mine footprint covers approximately 5,600 acres within a total controlled area of approximately 12,400 acres. Bonanza Creek is an open-pit heap-leach gold mine that has been in operation since 2001 and is currently active. The mine produces gold through cyanide heap-leach processing and has experienced several environmental incidents involving process solution releases and avian mortalities at solution ponds.
4. Kanawha Bend Chemical Plant
The Kanawha Bend Chemical Plant (the "Kanawha Bend Facility" or "Kanawha Bend") is located at 2200 Chemical Valley Road, Institute, Kanawha County, West Virginia 25112. The facility occupies approximately 78 acres and has been engaged in chemical manufacturing since 1985. The facility is currently active and operates under RCRA Permit No. WVD048823915 issued by the West Virginia Department of Environmental Protection. The Kanawha Bend Facility produces leaching agents and other industrial chemicals.
E. Summary of Alleged Violations
The Enforcement Action alleges violations under multiple federal environmental statutes at each of the four sites. The following is a summary of the principal allegations:
1. Clean Water Act Section 301 — Unpermitted Discharges
Ridgecrest Mine: The complaint alleges that acid mine drainage ("AMD") from the Ridgecrest Mine has been discharged to Flint Creek without authorization under a National Pollutant Discharge Elimination System ("NPDES") permit. The Bramwell Group elevated concentrations of copper, with an average measured concentration of 47 mg/L compared to the applicable aquatic life water quality standard of 0.0087 mg/L — a ratio of more than 5,400:1. The discharges are alleged to have caused significant ecological harm to Flint Creek and its tributaries.
Gallatin Facility: The complaint identifies 14 exceedances of the facility's Montana Pollutant Discharge Elimination System ("MPDES") permit for carbon disulfide ("CS₂") and total suspended solids ("TSS") during the period from January 2021 through June 2024. These exceedances are alleged to constitute violations of CWA § 301 as discharges not in compliance with the facility's permit conditions.
Bonanza Creek Mine: The complaint alleges three heap-leach pad releases at the Bonanza Creek Mine occurring in March 2022, August 2022, and January 2023. The releases resulted in discharges to waters of the United States containing weak acid dissociable ("WAD") cyanide at concentrations of 0.62 mg/L (compared to the applicable water quality criterion of 0.022 mg/L) and mercury at 12.4 µg/L (compared to the applicable criterion of 0.77 µg/L).
2. RCRA Sections 3004 and 3005 — Hazardous Waste Mismanagement
Ridgecrest Mine: Mismanagement of hazardous waste generated from the solvent extraction-electrowinning ("SX-EW") circuit at the mine, including failure to properly characterize, label, and store spent solvent and circuit bleed solutions.
Gallatin Facility: Unpermitted storage of hazardous waste at three solid waste management units ("SWMUs") at the facility, in violation of RCRA permit conditions.
Bonanza Creek Mine: Improper management of spent heap-leach ore, which EPA contends constitutes a hazardous waste requiring management in accordance with RCRA Subtitle C requirements.
Kanawha Bend Facility: Unpermitted treatment of listed hazardous wastes, specifically K062 (spent pickle liquor from steel finishing) and D002 (corrosive characteristic waste), at the facility without the required RCRA treatment permit.
3. CERCLA Section 107 — Cost Recovery
The United States seeks reimbursement of EPA response costs totaling $18.1 million, consisting of $14.3 million for removal actions conducted at the Ridgecrest Mine between 2021 and 2023, and $3.8 million for emergency response costs incurred in connection with a June 14, 2020 sulfuric acid release at the Kanawha Bend Facility.
4. Migratory Bird Treaty Act
The complaint alleges 17 avian mortalities at the Bonanza Creek Mine solution ponds during the period from 2021 through 2023, in violation of the MBTA. The mortalities involved migratory birds that came into contact with cyanide-bearing process solutions in the mine's heap-leach solution collection ponds.
III. APPLICABLE SEC DISCLOSURE REQUIREMENTS
A. Form 20-F Disclosure Framework for Foreign Private Issuers
TMC files its annual report on Form 20-F with the SEC pursuant to Section 13(a) of the Exchange Act and the rules and regulations promulgated thereunder. Form 20-F is the annual reporting form prescribed for foreign private issuers, and its disclosure requirements are, in many respects, analogous to — though not identical with — those applicable to domestic issuers filing on Form 10-K under Regulation S-K.
In light of the Consent Decree and the associated financial obligations, the following sections of the Form 20-F require substantive updates for the FY2024 filing:
Item 3.D — Risk Factors. Item 3.D requires the Company to provide a description of the material risks to which it is exposed. This is the Form 20-F analogue to the risk factor disclosure required by Regulation S-K Item 105 for domestic issuers. TMC's existing risk factor disclosures address environmental and regulatory risks in general terms, but do not reflect the specific, quantified obligations arising from the Consent Decree.
Item 4.B — Business Overview. Item 4.B requires a description of the material aspects of the Company's business, including the regulatory environment in which it operates. TMC's environmental regulation discussion should be updated to reflect the Consent Decree and the enhanced compliance requirements it imposes on the Company's active facilities.
Item 8.A.7 — Legal Proceedings. Item 8.A.7 requires disclosure of legal proceedings in accordance with Regulation S-K Item 103. As discussed in detail below, the Consent Decree clearly triggers the disclosure thresholds applicable to environmental proceedings involving governmental parties.
Item 5 — Operating and Financial Review and Prospects (MD&A). Item 5 requires a discussion of the Company's financial condition, results of operations, liquidity, and capital resources, including known trends, commitments, events, or uncertainties that are reasonably likely to have a material effect. The Consent Decree creates significant known commitments that must be addressed in this section.
In addition, the Company's financial statements included in the Form 20-F must contain appropriate footnote disclosures regarding environmental contingencies and remediation obligations. These footnote disclosures must be cross-referenced from the narrative disclosure sections identified above.
B. Item 3.D — Risk Factors
The SEC's risk factor disclosure requirements, as articulated in Regulation S-K Item 105 (which is incorporated by reference into Form 20-F), require an issuer to disclose the material factors that make an investment in the issuer speculative or risky. The Commission's guidance emphasizes that risk factors should be specific to the issuer and should not be merely generic warnings. Risk factors should describe how the risk affects the issuer or its securities, and, where possible, should be quantified.
The Consent Decree and its associated obligations constitute a material risk to TMC's business, financial condition, results of operations, and cash flows. The $409.9 million grand total nominal obligation represents approximately 11.5% of TMC's FY2023 revenue (US$3.56 billion) and approximately 48.6% of TMC's FY2023 EBITDA (US$843 million). By any measure, obligations of this magnitude are material and must be prominently disclosed in the Company's risk factors.
The risk factor disclosures should address, at a minimum, the following topics:
(i) The scope and nature of the remediation obligations, including the uncertainty inherent in cost estimates spanning a 30-year horizon and the risk that actual costs may exceed current estimates due to unforeseen subsurface conditions, changes in regulatory requirements, or modifications to the remedy;
(ii) The ongoing regulatory compliance risks at the Company's active facilities (Gallatin, Bonanza Creek, and Kanawha Bend), including the enhanced compliance and monitoring requirements imposed by the Consent Decree;
(iii) The stipulated penalty provisions, which create an ongoing contingent financial exposure at rates of $1,500 per day per violation for the first 30 days, increasing to $3,000 per day for days 31 through 60, and further increasing to $5,500 per day thereafter;
(iv) The financial assurance obligations totaling $245.0 million, consisting of a $165.0 million surety bond and an $80.0 million remediation trust fund, and the impact of these obligations on the Company's financial flexibility and liquidity;
(v) The insurance coverage dispute with Meridian Environmental Insurance Company ("Meridian"), which has denied coverage for two of the four sites and the resulting risk that TMC may be required to bear a larger share of costs than currently anticipated; and
(vi) The potential impact on the Company's credit facility covenants, including the environmental liability covenant under the Company's C$750.0 million revolving credit facility with Harborstone National Bank, N.A.
C. Item 8.A.7 — Legal Proceedings
Item 8.A.7 of Form 20-F requires disclosure of legal proceedings in accordance with the instructions set forth in Regulation S-K Item 103. The general instruction is to describe briefly any material pending legal proceedings, other than ordinary routine litigation incidental to the business, to which the registrant or any of its subsidiaries is a party.
With respect to environmental proceedings specifically, Regulation S-K Item 103(c)(3) provides that an issuer must disclose any proceeding arising under any federal, state, or local provisions regulating the discharge of materials into the environment or primarily for the purpose of protecting the environment, if:
(a) The proceeding is material to the business or financial condition of the issuer;
(b) The proceeding involves potential monetary sanctions, and a governmental authority is a party to the proceeding, and the potential monetary sanctions exceed $300,000 (or such other threshold as the issuer may have elected to use, not to exceed $1,000,000); or
(c) The proceeding involves potential monetary sanctions exceeding a threshold that the issuer has determined to be material and has disclosed in its filings.
The Consent Decree clearly and unambiguously exceeds all applicable disclosure thresholds. The civil penalty alone is $31.5 million — more than 100 times the $300,000 threshold. The aggregate remediation obligation of $343.5 million is material by any conceivable standard. The grand total estimated obligation of $409.9 million is substantial in both absolute terms and relative to TMC's financial metrics. Moreover, the United States, acting through the EPA and the DOJ, is a party to the proceeding, and three state governments are co-plaintiffs. Accordingly, full disclosure under Item 8.A.7 is mandatory.
The legal proceedings disclosure must include: the case caption, the court in which the proceeding is pending, the nature of the proceeding, a description of the relief sought, the current status of the proceeding, and, if known, the amount of any penalty or obligation imposed. Given that the Consent Decree terms are public (having been lodged with the Court), TMC should disclose the specific financial terms of the settlement in appropriate detail.
D. Item 5 — Operating and Financial Review and Prospects (MD&A)
Item 5 of Form 20-F requires a discussion of the Company's operating results and financial condition from management's perspective. The MD&A requirements are modeled on Regulation S-K Item 303 and require disclosure of "known trends or known demands, commitments, events or uncertainties" that will result in or are "reasonably likely to result in" the registrant's liquidity increasing or decreasing in any material way.
The Consent Decree creates a series of known financial commitments extending over a period of up to 30 years. These commitments will have a direct impact on TMC's liquidity and capital resources and must be discussed in the MD&A section. Specific commitments requiring disclosure include:
• Civil penalty payment schedule: Four quarterly installments of $7.875 million each, with the first installment due 30 days after the Effective Date (approximately July 14, 2025) and subsequent installments at 12, 24, and 36 months after entry of the Consent Decree.
• Remediation trust fund deposit: An initial deposit of $80.0 million into a remediation trust fund with Larchfield Trust Company, N.A., due within 90 days of the Effective Date (approximately September 12, 2025).
• Surety bond premiums: An annual premium of $3.0525 million for the $165.0 million surety bond issued by Ironbark Surety of America, Inc.
• EPA past-costs reimbursement: A lump sum payment of $18.1 million.
• Supplemental environmental project expenditures: $12.0 million across three SEPs.
• Independent monitor costs: Estimated at approximately $960,000 per year for a minimum of 5 years, totaling approximately $4.8 million.
• Remediation expenditures: Variable by year, commencing with remedial action work plan development and ramping up to remedy construction at the Ridgecrest Mine beginning June 14, 2027.
The MD&A must also discuss the impact of these commitments on the Company's credit facility, the potential for insurance recoveries, and the uncertainty surrounding the timing and amount of remediation expenditures.
E. Financial Statement Footnote Requirements
The financial statements included in the Form 20-F must contain appropriate footnote disclosures regarding environmental contingencies and remediation obligations. The applicable accounting standards are ASC 450 (Contingencies) under U.S. GAAP and IAS 37 (Provisions, Contingent Liabilities and Contingent Assets) under IFRS. Because TMC reports under IFRS (as adopted by the International Accounting Standards Board), IAS 37 is the primary applicable standard, although ASC 450 provides useful supplementary guidance given the SEC filing context.
As previously noted, a separate draft financial statement footnote was prepared on February 28, 2025, and provided to Ridgeline Accounting Partners LLP for review. That footnote addresses the nature and scope of the environmental obligations, the best estimate and range of remediation costs, the payment schedule, financial assurance arrangements, insurance coverage disputes, estimated recoveries, and the contingent exposure for stipulated penalties.
TMC's current environmental reserve stands at C$340.0 million (approximately US$251.4 million) as of Q3 2024. The Consent Decree establishes a nominal obligation of approximately US$409.9 million, resulting in a material shortfall of approximately US$158.5 million. This shortfall must be addressed before the FY2024 year-end financial statements are finalized. Coordination with Ridgeline Accounting Partners LLP on the reserve adequacy assessment is ongoing; we responded to the auditor's inquiry letter on March 3, 2025 (via a separate letter addressed to Frances Whitmore, CPA, CA, Engagement Partner, Ridgeline Accounting Partners LLP).
Under IAS 37, a provision must be recognized when (a) an entity has a present obligation as a result of a past event, (b) it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation, and (c) a reliable estimate can be made of the amount of the obligation. The provision should be measured at the best estimate of the expenditure required to settle the present obligation. Where there is a range of equally likely outcomes, IAS 37 requires use of the mid-point of the range. Under ASC 450, when a loss is probable and a range of loss can be estimated but no amount within the range is a better estimate than any other, the minimum of the range should be accrued. Given the specificity of the negotiated Consent Decree amounts, the $409.9 million nominal figure represents a reasonable best estimate for disclosure purposes, although the Company should note the estimation uncertainty inherent in long-term remediation cost projections.
IV. MATERIALITY ASSESSMENT
A. Quantitative Materiality Analysis
The following table summarizes the quantitative materiality analysis for the Consent Decree obligations relative to TMC's key financial metrics:
Each of these ratios substantially exceeds commonly applied quantitative materiality thresholds. A charge equal to 48.6% of EBITDA is extraordinary by any standard. Similarly, an obligation representing 11.5% of revenue and 14.1% of CNTA is well beyond the 5% threshold often used as a general benchmark in the materiality literature, although we acknowledge that materiality is ultimately a facts-and-circumstances determination and cannot be reduced to any single bright-line percentage.
Moreover, each individual site obligation independently exceeds the $300,000 threshold specified in Regulation S-K Item 103(c)(3) for environmental proceedings disclosures involving governmental parties. The civil penalty alone ($31.5 million) is material in its own right. The remediation obligations ($343.5 million nominal / $245.1 million NPV) are clearly material as well. Accordingly, the aggregate obligation is material by any standard.
B. Qualitative Materiality Factors
Beyond the quantitative analysis, several qualitative factors reinforce the materiality determination:
Nature of the Proceeding. The Enforcement Action is a federal government enforcement action brought by the EPA and the DOJ, with three state governments as co-plaintiffs. Government enforcement actions carry significant reputational and regulatory risk beyond their direct financial impact. They may affect the Company's ability to obtain permits, maintain regulatory goodwill, and operate in affected jurisdictions. The involvement of multiple federal and state agencies across three states amplifies these concerns.
Duration of Obligations. The Consent Decree imposes remediation obligations spanning up to 30 years at the Ridgecrest Mine and 15 to 20 years at the other three sites. Obligations of this duration create sustained uncertainty regarding total costs and operational impacts. The extended time horizon increases the risk that actual costs will diverge materially from current estimates due to factors such as unforeseen subsurface contamination, changes in cleanup standards, inflation, and technological evolution.
Ongoing Operational Impact. Three of the four sites covered by the Consent Decree — Gallatin, Bonanza Creek, and Kanawha Bend — are currently active facilities. The Consent Decree imposes enhanced compliance requirements at each of these facilities, including independent environmental monitoring by a court-appointed monitor, Verdant Analytics, Inc. (Dr. Kamal Osei, Senior Environmental Scientist and Project Director). These requirements will affect day-to-day operations, may constrain production flexibility, and will require ongoing management attention and expenditure.
Insurance Coverage Uncertainty. TMC maintains a pollution legal liability ("PLL") policy with Meridian Environmental Insurance Company (Policy No. MEI-ENV-2021-04738), which has a per-occurrence limit of $50.0 million and an aggregate limit of $75.0 million, subject to a self-insured retention ("SIR") of $5.0 million per occurrence. However, Meridian has denied coverage for the Ridgecrest Mine (invoking the pollution/known-conditions exclusion) and the Kanawha Bend Facility (alleging late notice). Coverage has been acknowledged for the Gallatin and Bonanza Creek sites, subject to the SIR. The insurance coverage dispute creates significant uncertainty regarding the net cost to TMC. If coverage is not recovered for Ridgecrest and Kanawha Bend, the Company will bear the full cost of remediation at those sites without any insurance offset.
Stipulated Penalties. The Consent Decree includes stipulated penalty provisions that create ongoing contingent exposure. Stipulated penalties accrue at $1,500 per day per violation for the first 30 days of noncompliance, $3,000 per day per violation for days 31 through 60, and $5,500 per day per violation thereafter. For a multi-site consent decree involving numerous compliance milestones and operational requirements, the cumulative stipulated penalty exposure could become significant if compliance lapses occur.
D&O Implications. TMC has filed a notice of circumstances with its directors' and officers' liability insurer, Clearwater Mutual Insurance, Ltd. (Policy No. CMI-DO-2023-10221), in connection with the Enforcement Action. The potential for director and officer exposure adds an additional dimension to the materiality analysis, particularly in light of the securities disclosure issues discussed in this memorandum.
C. Materiality Conclusion
Based on the foregoing quantitative and qualitative analysis, we conclude without hesitation that the Consent Decree and all related obligations are unambiguously material to Torchlight Mining Corp. for purposes of SEC disclosure. The obligations must be disclosed in the risk factors, legal proceedings, MD&A, and financial statement footnotes of the Company's Form 20-F.
We further note that failure to make adequate disclosure would expose TMC and its officers to potential SEC enforcement action for violations of Section 13(a) of the Exchange Act and Rule 13a-1 thereunder, as well as private securities litigation under Section 10(b) of the Exchange Act and Rule 10b-5 promulgated thereunder. Given the magnitude of the obligations and the public nature of the Consent Decree (which is a matter of public record having been lodged with a federal court and noticed in the Federal Register), the risk of a securities fraud claim based on material omissions would be substantial and difficult to defend.
V. RECOMMENDED RISK FACTOR DISCLOSURE UPDATES
Based on our analysis, we recommend that TMC add or update the following risk factors in Item 3.D of its FY2024 Form 20-F. Draft disclosure language for each risk factor is provided in Section VIII below.
A. New or Updated Risk Factor: Environmental Remediation Obligations
We recommend that TMC include a new risk factor — or substantially update the existing environmental remediation risk factor — with the following recommended caption:
"We are subject to significant environmental remediation obligations under a consent decree with the U.S. EPA and DOJ that could materially affect our financial condition, results of operations, and cash flows."
This risk factor should describe, at a minimum, the following:
• The Enforcement Action and the four affected sites (Ridgecrest, Gallatin, Bonanza Creek, and Kanawha Bend), including the nature of the contamination and alleged violations at each site;
• The total nominal remediation obligation of $343.5 million, to be performed over periods ranging from 15 to 30 years;
• The civil penalties of $31.5 million, payable in quarterly installments over 36 months;
• The EPA past-costs reimbursement obligation of $18.1 million, consisting of $14.3 million for Ridgecrest removal actions and $3.8 million for Kanawha Bend emergency response;
• The supplemental environmental projects totaling $12.0 million, consisting of the Flint Creek Watershed Restoration ($5.5 million), the Battle Mountain Drinking Water project ($3.5 million), and the Institute Air Quality Monitoring project ($3.0 million);
• The independent environmental monitoring costs estimated at $4.8 million over 5 years;
• The grand total estimated obligation of approximately $409.9 million;
• The risk that actual costs may exceed estimates due to unforeseen subsurface conditions, changes in regulatory standards, inflation, or modifications to the remedy;
• A cross-reference to the financial assurance obligations ($245.0 million in surety bonds and remediation trust fund); and
• The stipulated penalty exposure for failure to meet compliance milestones.
B. New or Updated Risk Factor: Financial Assurance and Liquidity Impact
We recommend a separate risk factor addressing the financial assurance obligations under the Consent Decree, with the following recommended caption:
"Our obligation to maintain $245.0 million in financial assurance instruments may limit our financial flexibility and liquidity."
This risk factor should address:
• The surety bond requirement of $165.0 million, issued by Ironbark Surety of America, Inc. (Bond No. ISA-ENV-2025-08934), with an annual premium of $3.0525 million (1.85% of face value);
• The remediation trust fund deposit of $80.0 million with Larchfield Trust Company, N.A. (Trust Agreement No. LTC-REM-2025-1177);
• TMC's indemnification obligations under the surety bond agreement, which could expose the Company to additional liability in the event the surety is called upon to perform;
• The risk that the surety may not renew the bond at its current face value or premium rate, or may decline to renew altogether, which could require the Company to post alternative forms of financial assurance at potentially higher cost;
• The impact of these obligations on the Company's borrowing capacity and its ability to comply with covenants under the C$750.0 million revolving credit facility with Harborstone National Bank, N.A.; and
• The environmental liability covenant under the credit facility, which requires that aggregate environmental liabilities not exceed 25% of CNTA (currently a threshold of C$980.0 million, with current headroom of C$425.6 million).
C. New or Updated Risk Factor: Insurance Coverage Disputes
We recommend a risk factor addressing the insurance coverage dispute, with the following recommended caption:
"We are engaged in insurance coverage disputes that, if resolved unfavorably, could increase our net remediation costs."
This risk factor should describe:
• TMC's pollution legal liability policy with Meridian Environmental Insurance Company (Policy No. MEI-ENV-2021-04738), with a per-occurrence limit of $50.0 million, an aggregate limit of $75.0 million, and an SIR of $5.0 million per occurrence;
• Meridian's denial of coverage for the Ridgecrest Mine (based on the pollution/known-conditions exclusion) and the Kanawha Bend Facility (based on alleged late notice);
• Meridian's acknowledgment of coverage for the Gallatin and Bonanza Creek sites, subject to the SIR;
• The estimated recovery range of $45.0 million to $55.0 million (based on analysis by Northspire Capital Markets, Inc.), with a maximum theoretical recovery of $75.0 million if all disputes are resolved in TMC's favor; and
• The risk that if the coverage disputes are resolved unfavorably, TMC's unreimbursed remediation costs could increase significantly, and the Company may be required to bear the full cost of remediation at the Ridgecrest and Kanawha Bend sites without any insurance offset.
D. Existing Risk Factors Requiring Update
In addition to the new risk factors identified above, the following existing risk factors in TMC's Form 20-F should be reviewed and updated to reflect the Consent Decree:
Environmental Compliance Risk Factor. TMC's existing risk factor regarding environmental laws and regulations should be updated to reference the specific enhanced compliance requirements imposed by the Consent Decree at the Company's active facilities, including the independent monitoring program to be conducted by Verdant Analytics, Inc. The risk factor should note that failure to comply with these requirements could result in stipulated penalties, additional enforcement actions, or modifications to the Consent Decree.
Litigation and Legal Proceedings Risk Factor. TMC's existing risk factor regarding litigation and legal proceedings should be updated to reflect the resolution of the Enforcement Action through the Consent Decree, the pending court entry process, and the remaining procedural steps. The disclosure should make clear that while the Consent Decree represents a negotiated resolution of the Enforcement Action, the Company remains subject to ongoing obligations and potential penalties under its terms.
Credit Facility / Debt Covenant Risk Factor. TMC's existing risk factor regarding its credit facility should be updated to address the potential impact of the Consent Decree obligations on compliance with the environmental liability covenant under the Harborstone RCF, and the potential need for an amendment or waiver of the credit facility in the event that aggregate environmental liabilities approach or exceed the covenant threshold.
VI. RECOMMENDED LEGAL PROCEEDINGS DISCLOSURE (ITEM 8.A.7)
A. Case Description
The Item 8.A.7 legal proceedings disclosure should begin with a description of the Enforcement Action, including the full case caption, the court, the filing date, and the nature of the proceeding. The recommended approach is as follows:
The disclosure should identify the case as United States of America and State of Montana v. Torchlight Mining Corp., Torchlight Mining (U.S.) Inc., Torchlight Specialty Chemicals, Inc., Ridgecrest Mine Holdings, LLC, and Bonanza Creek Mining, LLC, with the States of Nevada and West Virginia consolidated as co-plaintiffs. The civil action number is 9:24-cv-00087-DWM. The case is pending in the U.S. District Court for the District of Montana, Missoula Division. The complaint was filed on January 18, 2024, by the DOJ, acting through its Environment and Natural Resources Division, Environmental Enforcement Section, on behalf of the EPA.
The nature of the proceeding should be described as a federal enforcement action alleging violations of CWA § 301, RCRA §§ 3004 and 3005, CERCLA § 107, and the MBTA at four facilities operated by TMC and its subsidiaries in the states of Montana, Nevada, and West Virginia.
B. Relief Sought and Settlement Terms
The disclosure should describe the terms of the Consent Decree in sufficient detail to inform investors of the nature and magnitude of the Company's obligations. The following categories of relief should be addressed:
Remediation Obligations: The Consent Decree requires TMC and its subsidiaries to perform environmental remediation at four sites at an aggregate estimated cost of $343.5 million on a nominal basis ($245.1 million on an NPV basis, using a 3% discount rate), over periods ranging from 15 years to 30 years.
Civil Penalties: TMC will pay civil penalties totaling $31.5 million, payable in four equal installments of $7.875 million each. The first installment is due 30 days after the Effective Date, with subsequent installments due at 12, 24, and 36 months after entry of the Consent Decree.
EPA Past-Costs Reimbursement: TMC will reimburse the EPA for past response costs totaling $18.1 million, consisting of $14.3 million for removal actions conducted at the Ridgecrest Mine between 2021 and 2023, and $3.8 million for emergency response costs incurred at the Kanawha Bend Facility in connection with a June 2020 sulfuric acid release. This amount is payable as a lump sum.
Supplemental Environmental Projects: TMC will fund three supplemental environmental projects totaling $12.0 million: the Flint Creek Watershed Restoration project ($5.5 million), the Battle Mountain Drinking Water project ($3.5 million), and the Institute Air Quality Monitoring project ($3.0 million).
Independent Environmental Monitoring: The Consent Decree provides for independent environmental monitoring by a court-appointed monitor, Verdant Analytics, Inc., for a minimum period of 5 years. TMC is responsible for the costs of the monitoring program, estimated at approximately $4.8 million.
Financial Assurance: TMC is required to maintain $245.0 million in financial assurance, consisting of a $165.0 million surety bond and an $80.0 million remediation trust fund.
Grand Total: The aggregate estimated financial obligation under the Consent Decree is approximately $409.9 million on a nominal basis.
C. Current Status
The disclosure should provide an up-to-date account of the procedural status of the Consent Decree, including:
• The Consent Decree was lodged with the Court on February 19, 2025;
• The 30-day public comment period, as required by 28 C.F.R. § 50.7, closed on March 21, 2025;
• The DOJ filed its motion for entry of the Consent Decree on April 7, 2025;
• The Court has scheduled a hearing on the motion for April 28, 2025;
• The Company expects the Court to enter the Consent Decree on or about May 15, 2025, with an Effective Date of approximately June 14, 2025 (30 days after entry, per Section IV of the Consent Decree).
D. Specific Site-by-Site Breakdown for Disclosure
To provide investors with a comprehensive understanding of the obligations, we recommend that the legal proceedings disclosure include a site-by-site breakdown of the financial obligations as follows:
The Bonanza Creek disclosure should also note that the Consent Decree addresses 17 avian mortalities at the mine's solution ponds during the period from 2021 through 2023, in connection with alleged violations of the MBTA.
VII. MD&A DISCLOSURE CONSIDERATIONS
A. Known Trends and Commitments
The Consent Decree creates a defined schedule of financial commitments extending up to 30 years, which must be discussed in the MD&A section of the Form 20-F as known commitments under Item 5. The discussion should address both near-term and long-term cash outflows.
Near-Term Cash Outflows (2025). The following significant cash outflows are expected within the first year following entry of the Consent Decree:
• Remediation trust fund deposit: $80.0 million, due within 90 days of the Effective Date (estimated deadline: September 12, 2025);
• First civil penalty installment: $7.875 million, due 30 days after the Effective Date (estimated: July 14, 2025);
• Surety bond premium: $3.0525 million per year, commencing upon issuance of the bond;
• EPA past-costs reimbursement: $18.1 million lump sum, due within 60 days of the Effective Date.
Civil Penalty Payment Schedule. The total civil penalty of $31.5 million is payable in four equal installments:
• $7.875 million at Effective Date + 30 days (approximately July 14, 2025);
• $7.875 million at 12 months after entry (approximately May 15, 2026);
• $7.875 million at 24 months after entry (approximately May 15, 2027);
• $7.875 million at 36 months after entry (approximately May 15, 2028).
Remediation Expenditures. Remediation expenditures will ramp up over time. The most significant early milestone is the commencement of remedy construction at the Ridgecrest Mine, which is required by June 14, 2027, following completion of the remedial action work plan (due December 14, 2025), remedial design (through 2026), and the Gallatin corrective measures study and Bonanza Creek liner repair commencement (June 14, 2026). In the interim, TMC will incur costs associated with remedial investigation and design activities, interim stabilization measures (particularly at Kanawha Bend, due December 14, 2026), and ongoing monitoring and reporting obligations.
B. Liquidity and Capital Resources
The MD&A should discuss the impact of the Consent Decree on TMC's liquidity and capital resources. Key considerations include:
Cash Position Impact. The near-term cash requirements are significant. The trust fund deposit of $80.0 million, the first civil penalty installment of $7.875 million, the EPA past-costs reimbursement of $18.1 million, and the initial surety bond premium will collectively require approximately $109 million in cash outflows during the second half of 2025. TMC management should assess whether current cash balances and operating cash flow are sufficient to fund these requirements without drawing on the revolving credit facility.
Ongoing Annual Costs. In addition to the near-term cash outflows, the Consent Decree will impose ongoing annual costs, including the surety bond premium ($3.0525 million per year), independent monitor fees (approximately $960,000 per year), and variable remediation expenditures pursuant to site-specific work plans. These costs are expected to increase over time as remediation activities progress from the investigative and design phases to the construction and operational phases.
Credit Facility Impact. TMC's C$750.0 million revolving credit facility with Harborstone National Bank, N.A. (the "Harborstone RCF"), with a maturity date of March 15, 2027, contains an environmental liability covenant that requires TMC's aggregate environmental liabilities not to exceed 25% of CNTA. Based on CNTA of C$3.92 billion as of Q3 2024, the covenant threshold is C$980.0 million. Assuming the full nominal obligation of US$409.9 million (approximately C$554.4 million at current exchange rates) is recognized as an environmental liability, TMC's current headroom under the covenant is approximately C$425.6 million. While this headroom is currently adequate, it should be monitored carefully as additional environmental liabilities may arise from other operations or from potential cost increases at the four Consent Decree sites. The approaching maturity date of the Harborstone RCF (March 15, 2027) also warrants discussion in the context of the Company's ability to refinance the facility in light of the Consent Decree obligations.
Potential Insurance Recoveries. TMC may receive insurance recoveries of $45.0 million to $55.0 million under the Meridian PLL policy (based on the Northspire Capital Markets, Inc. estimate), which would partially offset the costs of the Consent Decree. However, the timing and amount of any recoveries are uncertain due to the ongoing coverage disputes with Meridian regarding the Ridgecrest and Kanawha Bend sites. The MD&A should note this potential offset while emphasizing the uncertainty surrounding its realization.
C. Critical Accounting Estimates
The environmental remediation liability should be identified as a critical accounting estimate in the MD&A. The discussion should include:
• TMC's current environmental reserve of C$340.0 million (approximately US$251.4 million) as of Q3 2024;
• The need to increase the reserve by approximately US$158.5 million to align with the nominal grand total of US$409.9 million under the Consent Decree;
• The significant estimation uncertainty inherent in long-term remediation cost projections, noting that at the Ridgecrest Mine alone, remediation cost estimates range from TMC's initial estimate of $187.5 million to EPA's estimate of $224.0 million, with the negotiated amount of $198.6 million falling within this range;
• The sensitivity of NPV calculations to discount rate assumptions, noting that the 3% discount rate used in the NPV calculations produces a present value of $311.5 million, and that changes in the discount rate would materially affect the reported present value;
• The potential for actual costs to exceed current estimates due to unforeseen conditions, regulatory changes, inflation, or remedy modifications over the 15- to 30-year remediation period.
VIII. FINANCIAL STATEMENT FOOTNOTE CROSS-REFERENCES
This section addresses the coordination between the narrative disclosures in the Form 20-F and the financial statement footnotes. As noted above, a separate draft financial statement footnote was prepared on February 28, 2025, and has been provided to Ridgeline Accounting Partners LLP for review. The following summarizes the key coordination issues.
Nature and Scope of Footnote Disclosure. The environmental contingency footnote in the financial statements should disclose, at a minimum: the nature and scope of the environmental obligations under the Consent Decree; the best estimate of the aggregate remediation cost (and the range of estimates, where applicable); the payment schedule for civil penalties and other fixed obligations; the financial assurance arrangements (surety bond and trust fund); the insurance coverage disputes and estimated recoveries; and the contingent exposure for stipulated penalties.
Auditor Coordination. Coordination with Ridgeline Accounting Partners LLP is essential to ensure consistency between the narrative disclosures in the Form 20-F and the financial statement footnote disclosures. We responded to the auditor's inquiry letter on March 3, 2025, in a separate letter addressed to Frances Whitmore, CPA, CA, Engagement Partner, Ridgeline Accounting Partners LLP. The auditor inquiry letter requested confirmation of the status of the Enforcement Action, the terms of the Consent Decree, and Calderwood & Harkness's assessment of the probable outcome. Our response was prepared in accordance with the ABA Statement of Policy Regarding Lawyers' Responses to Auditors' Requests for Information and addressed the matters requested to the extent permitted by the Policy.
Application of IAS 37 / ASC 450. The environmental remediation obligation under the Consent Decree meets the criteria for recognition as a provision under IAS 37: TMC has a present obligation arising from past events (the environmental contamination and the Enforcement Action); it is probable that an outflow of resources will be required to settle the obligation (the Consent Decree has been substantially agreed and lodged with the Court); and a reliable estimate can be made of the amount (the negotiated remediation costs, civil penalties, and other obligations are specified in the Consent Decree). Accordingly, a full accrual at the best estimate is required.
Under IAS 37, the best estimate is the amount that an entity would rationally pay to settle the obligation at the end of the reporting period or to transfer it to a third party at that time. Where there is a continuous range of possible outcomes and each point in the range is as likely as any other, the mid-point of the range is used. In this case, the negotiated amounts in the Consent Decree provide a reasonable best estimate for each site, with the acknowledgment that actual costs may vary from these amounts.
Under ASC 450, when a loss is probable and estimable, the best estimate should be accrued. If no single amount within a range is a better estimate than any other, the minimum of the range is accrued. Given the specificity of the Consent Decree terms, the negotiated amounts represent the best estimate.
Reserve Adequacy. TMC's current environmental reserve of C$340.0 million (approximately US$251.4 million) is materially insufficient to cover the Consent Decree obligation of approximately US$409.9 million (approximately C$554.4 million at the exchange rate of C$1 = US$0.7394). The reserve shortfall of approximately US$158.5 million must be addressed before the FY2024 year-end financial statements are finalized. We recommend that TMC's management, in consultation with Ridgeline Accounting Partners LLP, determine the appropriate amount of the reserve increase and the quarter in which it should be recognized (Q4 2024 or, if appropriate under the subsequent events guidance, Q1 2025 as a Type I adjusting event).
IX. TIMING AND FILING CONSIDERATIONS
A. Form 20-F Filing Deadline
TMC's fiscal year ends on December 31. As a foreign private issuer, TMC is required to file its annual report on Form 20-F within four months after the end of the fiscal year, or such earlier date as may be applicable to accelerated filers. Accordingly, the filing deadline for the FY2024 Form 20-F is April 30, 2025.
The Consent Decree was lodged with the Court on February 19, 2025. As of the filing deadline, entry of the Consent Decree is expected but may not yet have occurred (the target entry date is May 15, 2025). However, this does not relieve TMC of the obligation to disclose the Consent Decree in the FY2024 Form 20-F. The underlying Enforcement Action was filed on January 18, 2024, and was pending as of the fiscal year-end on December 31, 2024. The Consent Decree was substantially agreed by February 3, 2025, and was formally lodged with the Court on February 19, 2025 — both dates occurring before the Form 20-F filing deadline.
From an accounting perspective, the Consent Decree should be treated as a subsequent event. Under IAS 10 (Events After the Reporting Period), a distinction is drawn between adjusting events (Type I events, which provide evidence of conditions that existed at the end of the reporting period) and non-adjusting events (Type II events, which are indicative of conditions that arose after the reporting period). Given that the environmental contamination, the Enforcement Action, and the settlement negotiations all existed at or before December 31, 2024, the Consent Decree likely constitutes a Type I adjusting event requiring adjustment to the financial statements and related disclosures.
In any event, regardless of how the event is classified for accounting purposes, disclosure is required. If the Consent Decree is classified as a non-adjusting event, IAS 10 still requires disclosure of the nature of the event and an estimate of its financial effect. The narrative disclosures in Items 3.D, 8.A.7, and 5 of the Form 20-F are not dependent on this accounting classification and must include the Consent Decree information in any case.
B. Form 6-K Interim Reporting
TMC should consider whether a Form 6-K report is appropriate upon entry of the Consent Decree. The entry of the Consent Decree by the Court, expected on or about May 15, 2025, will constitute a significant and material event in the life of the Company. Although foreign private issuers are not subject to the same current reporting obligations as domestic issuers under Form 8-K, Form 6-K provides a mechanism for furnishing material information to the SEC and U.S. investors on an interim basis.
We recommend that TMC file a Form 6-K promptly after entry of the Consent Decree. The filing should include:
• A press release announcing the entry of the Consent Decree and summarizing its key terms;
• A summary of the financial obligations under the Consent Decree, organized by category (remediation, civil penalties, past-costs, SEPs, monitoring); and
• A statement regarding the Company's financial preparedness to fulfill its obligations, including references to the financial assurance arrangements.
We further note that TMC's continuous disclosure obligations under Canadian securities law, including National Instrument 51-102 (Continuous Disclosure Obligations), may require the filing of a material change report with Canadian securities regulators promptly upon entry of the Consent Decree. The material change report should be coordinated with the Form 6-K filing to ensure consistency.
C. Coordination with Canadian Disclosure Obligations
TMC is subject to Canadian securities law requirements in addition to its SEC reporting obligations. As a reporting issuer in Canada, TMC is required to comply with National Instrument 51-102, which governs continuous disclosure, including annual information forms ("AIFs"), management's discussion and analysis, and material change reports. The Company's AIF and Canadian MD&A must be consistent with the disclosure in the Form 20-F.
We recommend that TMC's Canadian securities counsel review the draft Form 20-F disclosure language prepared by this firm to ensure that the Canadian filings are consistent in all material respects