PRIVILEGED & CONFIDENTIAL ATTORNEY-CLIENT PRIVILEGE / ATTORNEY WORK PRODUCT
March 5, 2025
MEMORANDUM
TO: Miriam Soo-Hwan Park, General Counsel, Torchlight Mining Corp. Carolyn Bracebridge, Chief Financial Officer, Torchlight Mining Corp.
FROM: Harrison Wexford, Partner, Calderwood & Harkness LLP Grace Nakamura, Associate, Calderwood & Harkness LLP
RE: Assessment of Potential Amendment or Waiver Needs Under the Harborstone National Bank, N.A. Syndicated Revolving Credit Facility in Connection with the EPA/DOJ Consent Decree
Matter No.: 1039-00003
This memorandum is protected by the attorney-client privilege and constitutes attorney work product prepared in anticipation of litigation and in connection with the provision of legal advice. It is intended solely for the use of the individuals named above and other authorized representatives of Torchlight Mining Corp. This memorandum should not be disclosed to any third party without the prior written consent of Calderwood & Harkness LLP, as such disclosure may result in a waiver of the applicable privileges. Nothing in this memorandum constitutes a guarantee or assurance of any particular outcome.
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I. Executive Summary
The purpose of this memorandum is to analyze whether the obligations arising from the consent decree entered in United States of America and State of Montana v. Torchlight Mining Corp. et al., Civil Action No. 9:24-cv-00087-DWM, pending before the United States District Court for the District of Montana, Missoula Division (Hon. Donald W. Molloy), may require Torchlight Mining Corp. ("TMC" or the "Company") to seek an amendment to, or waiver under, its existing C$750.0 million syndicated revolving credit facility (the "RCF" or the "Credit Facility") with Harborstone National Bank, N.A. ("Harborstone") as administrative agent, maturing March 15, 2027. This memorandum is prepared at the request of the Office of the General Counsel and the Office of the Chief Financial Officer to inform TMC's strategic planning with respect to both the consent decree implementation and the ongoing management of its credit relationships.
Summary Conclusion. Based on our analysis, TMC currently maintains adequate headroom under the environmental liability covenant contained in the RCF. As of the most recent measurement date, TMC's aggregate environmental liabilities, inclusive of the consent decree obligations, total approximately C$554.4 million, measured against the covenant threshold of 25% of Consolidated Net Tangible Assets ("CNTA"), which equals C$980.0 million. This yields headroom of approximately C$425.6 million. Accordingly, the environmental liability covenant itself does not presently necessitate an amendment or waiver.
However, our review has identified several other covenant provisions within the Credit Facility that may be implicated by specific obligations arising under the consent decree. In particular, the negative pledge and lien restriction covenants, the permitted indebtedness definitions, the material adverse change ("MAC") or material adverse effect ("MAE") representations, and the reporting and notification obligations each warrant careful analysis in the context of the consent decree's financial assurance requirements, including the $165.0 million surety bond and the $80.0 million remediation trust fund. Additionally, the restricted payments and investments covenants and any capital expenditure limitations may be triggered by the mechanics of the trust fund deposit, the supplemental environmental projects, and the near-term cash outlays required under the consent decree.
This memorandum identifies three categories of potential covenant triggers — rated as high, moderate, and low risk — and recommends a proactive engagement strategy with Harborstone and the lending syndicate. Our recommendation is that TMC initiate discussions with Harborstone promptly to preview the potential need for a limited amendment or formal consent, with the objective of securing any necessary lender approvals well in advance of the September 12, 2025 deadline for establishing financial assurance under the consent decree.
This memorandum should be read in conjunction with the following related documents, copies of which are maintained in the matter file:
• The companion disclosure letter sent by TMC to Harborstone National Bank, N.A. dated March 1, 2025, providing formal notification of the consent decree and the related environmental liabilities (the "Disclosure Letter");
• The environmental covenant compliance memorandum prepared by this firm dated November 18, 2024 (the "November 2024 Compliance Memorandum"), which analyzed TMC's covenant position prior to the lodging of the consent decree;
• The draft covenant compliance certificate prepared by TMC's Treasury Department dated February 25, 2025 (the "Draft Compliance Certificate"), which is currently under review by this firm and TMC's auditors; and
• The financial analyses prepared by Northspire Capital Markets, Inc. ("Northspire"), TMC's financial advisor (engagement lead: Vivian Okafor, Managing Director), which have been consulted in the preparation of the financial impact analysis contained in Sections II, V, and VI below.
II. Background
A. The Consent Decree Obligations
On February 19, 2025, the United States Department of Justice, on behalf of the United States Environmental Protection Agency ("EPA"), and the State of Montana, Department of Environmental Quality ("MDEQ"), lodged a proposed consent decree with the United States District Court for the District of Montana, Missoula Division, in United States of America and State of Montana v. Torchlight Mining Corp. et al., Civil Action No. 9:24-cv-00087-DWM. The consent decree is subject to a 30-day public comment period, which closes on March 21, 2025. Following the close of the comment period and the government's review of any comments received, the United States is expected to file a motion for entry of the consent decree on or about April 7, 2025. The target date for judicial entry by the Honorable Donald W. Molloy is May 15, 2025, with the "Effective Date" as defined in the consent decree falling 30 days thereafter, on June 14, 2025.
The consent decree represents the culmination of negotiations between TMC, the EPA, the DOJ Environment and Natural Resources Division, and the State of Montana that have been ongoing since approximately mid-2023. The decree resolves claims under the Comprehensive Environmental Response, Compensation, and Liability Act ("CERCLA"), 42 U.S.C. §§ 9601 et seq., and the Resource Conservation and Recovery Act ("RCRA"), 42 U.S.C. §§ 6901 et seq., as well as related state law claims, arising from contamination at four sites operated or formerly operated by TMC and its subsidiaries.
The grand total estimated obligations under the consent decree are $409.9 million nominal. These obligations are comprised of the following components:
1. Total Remediation Costs: $343.5 Million Nominal ($245.1 Million NPV)
The consent decree requires TMC to perform or fund remediation activities at four sites, with estimated costs broken down as follows:
(a) Ridgecrest Copper-Molybdenum Mine (Drummond, Granite County, Montana). The Ridgecrest site is a former open-pit copper-molybdenum mine that operated from 1958 through 1992 under TMC's predecessor-in-interest, Consolidated Copper & Metals, Inc. The consent decree requires TMC to perform a comprehensive remedy including source control, groundwater extraction and treatment, surface water management, tailings consolidation, revegetation, and long-term monitoring. The estimated cost of remediation at Ridgecrest is $198.6 million over a 30-year implementation period, with a net present value of $134.9 million (using a 3% discount rate consistent with EPA guidance and TMC's own internal cost estimation methodology). The Ridgecrest site represents the single largest remediation obligation under the consent decree and is the site with the most complex hydrogeological conditions. We note that the EPA's initial cost estimate for Ridgecrest was $224.0 million, while TMC's internal estimate was $187.5 million; the negotiated figure of $198.6 million represents a compromise, but there is no guarantee that costs will not escalate over the 30-year remediation period due to remedy modifications, change orders, or unforeseen site conditions.
(b) Gallatin Chemical Works (Belgrade, Gallatin County, Montana). The Gallatin site is an active chemical processing facility that has operated under TMC's subsidiary, Torchlight Chemical Processing, Inc., since 1971. The remediation required at Gallatin involves soil excavation and disposal, vapor intrusion mitigation, and groundwater monitoring. The estimated cost is $42.8 million over a 15-year period, with a net present value of $34.1 million at the 3% discount rate.
(c) Bonanza Creek Gold Mine (Lander County, Nevada). The Bonanza Creek site is a currently operating gold mine held through TMC's subsidiary, Torchlight Mining (U.S.) Inc. Remediation requirements include acid mine drainage treatment, heap leach pad closure, and ecological restoration along Bonanza Creek. The estimated cost is $63.2 million over a 20-year period, with a net present value of $47.1 million.
(d) Kanawha Bend Chemical Plant (Institute, Kanawha County, West Virginia). The Kanawha Bend site is a former specialty chemical plant that ceased operations in 2014 and was acquired by TMC through its 2009 acquisition of Appalachian Chemical Holdings, LLC. The remediation involves decommissioning, hazardous waste removal, soil treatment, and groundwater monitoring. The estimated cost is $38.9 million over a 20-year period, with a net present value of $29.0 million.
2. Civil Penalties: $31.5 Million
The consent decree imposes civil penalties totaling $31.5 million. These penalties are payable in four quarterly installments of $7.875 million each, with the first installment due 30 days after the Effective Date (i.e., on or about July 14, 2025), and subsequent installments due at 12 months, 24 months, and 36 months after the date of entry of the consent decree.
3. EPA Past-Costs Reimbursement: $18.1 Million
Pursuant to CERCLA § 107, 42 U.S.C. § 9607, TMC is required to reimburse the EPA for past response costs incurred at two of the four sites. The past-costs reimbursement obligation totals $18.1 million, comprised of $14.3 million for costs incurred at the Ridgecrest site and $3.8 million for costs incurred at the Kanawha Bend site. The timing and payment terms for this reimbursement are set forth in Appendix G to the consent decree; the payment is generally due within 60 days of entry of the decree.
4. Supplemental Environmental Projects (SEPs): $12.0 Million
The consent decree requires TMC to fund three supplemental environmental projects with a combined value of $12.0 million:
• Flint Creek Watershed Restoration Project (Granite County, Montana): $5.5 million, to be implemented in coordination with the Flint Creek Conservation District and the Montana Department of Fish, Wildlife and Parks;
• Battle Mountain Community Drinking Water Project (Lander County, Nevada): $3.5 million, involving construction of an upgraded public water supply system for the community adjacent to the Bonanza Creek mine; and
• Institute Community Air Quality Monitoring Project (Kanawha County, West Virginia): $3.0 million, establishing a community-based air quality monitoring network in the vicinity of the Kanawha Bend site.
The SEP commitments are binding and enforceable obligations under the consent decree, with implementation milestones and reporting requirements specified in Appendices J, K, and L.
5. Independent Monitor Costs: $4.8 Million
The consent decree requires the appointment of an independent monitor, Verdant Analytics, Inc., to oversee TMC's compliance with remediation milestones and quality assurance/quality control standards. The estimated cost of the independent monitor over the five-year monitoring period is $4.8 million (approximately $960,000 per year). TMC is required to fund the monitor's costs directly.
B. Financial Assurance Package
The consent decree requires TMC to establish financial assurance mechanisms demonstrating its ability to fund the required remediation activities. The total financial assurance required under the consent decree is $245.0 million, comprised of two components:
Surety Bond. TMC has arranged for the issuance of a surety bond in the amount of $165.0 million by Ironbark Surety of America, Inc. (Bond No. ISA-ENV-2025-08934). The bond names the EPA as obligee and guarantees TMC's performance of the remediation obligations at the Ridgecrest and Bonanza Creek sites. The annual premium for the bond is 1.85%, or approximately $3.0525 million per year. As a condition to the issuance of the bond, Ironbark will require TMC and its subsidiary Torchlight Mining (U.S.) Inc. to execute a General Agreement of Indemnity (the "GAI"), the terms of which are discussed in detail in Section III.B below. The bond premium represents an ongoing annual expense that TMC will need to incorporate into its operating budget and cash flow projections for the duration of the remediation period.
Remediation Trust Fund. TMC is required to establish a remediation trust fund with an initial deposit of $80.0 million at Larchfield Trust Company, N.A. (Trust Agreement No. LTC-REM-2025-1177; trust officer: David Henshaw). The trust fund is intended to cover remediation obligations at the Gallatin Chemical Works and Kanawha Bend Chemical Plant sites. The terms of the trust agreement require that the trust be irrevocable and that disbursements from the trust be subject to EPA approval, consistent with EPA's model trust agreement for CERCLA remedial actions.
The deadline to establish the remediation trust fund and post all required financial assurance under the consent decree is September 12, 2025, which falls 90 days after the Effective Date. This deadline is a critical milestone for purposes of the credit facility analysis, as the establishment of the financial assurance instruments — and the execution of the related contractual arrangements — is the event most likely to trigger covenant implications under the RCF.
C. The Harborstone RCF — Key Terms
The RCF is TMC's primary source of committed revolving credit liquidity. The following summarizes the key terms relevant to this analysis:
Facility Size: C$750.0 million syndicated revolving credit facility.
Administrative Agent: Harborstone National Bank, N.A.
Syndicate Participants: The lending syndicate consists of fourteen financial institutions, including Harborstone (as lead arranger and bookrunner), Montrose Capital Markets Inc., Dominion Bank of Canada, Westbourne Financial Corporation, and ten additional participant lenders.
Maturity Date: March 15, 2027.
Interest Rate: CDOR plus an applicable margin ranging from 125 to 200 basis points depending on TMC's leverage ratio.
Required Lenders: Lenders holding not less than 66⅔% of the aggregate commitments, required for most amendments and waivers.
The following financial metrics and covenant calculations are based on TMC's financial statements as of the end of the third fiscal quarter of 2024 (September 30, 2024), as reported in TMC's Form 10-Q filed with the SEC on November 8, 2024, and as supplemented by management estimates:
Consolidated Net Tangible Assets (CNTA): C$3.92 billion.
Environmental Liability Covenant: Aggregate disclosed and undisclosed environmental liabilities shall not exceed 25% of CNTA = C$980.0 million.
Current Total Environmental Liabilities (including consent decree): Approximately US$409.9 million ≈ C$554.4 million (converted at the prevailing exchange rate of C$1 = US$0.7394 as of the date of this memorandum).
Covenant Headroom: C$980.0 million − C$554.4 million = C$425.6 million.
FY2023 Revenue: C$4.82 billion (approximately US$3.56 billion).
FY2023 EBITDA: C$1.14 billion (approximately US$843 million).
Market Capitalization (as of October 2024): Approximately C$7.6 billion (based on TSX closing price).
As of the most recent quarterly filing, TMC's environmental remediation reserve recorded on its balance sheet was C$340.0 million (approximately US$251.4 million). This reserve was established in accordance with generally accepted accounting principles ("GAAP"), specifically ASC 450 (Contingencies) and the corresponding guidance under IAS 37 (Provisions, Contingent Liabilities and Contingent Assets), as reported by TMC under International Financial Reporting Standards for its Canadian filings.
The shortfall between TMC's existing reserve and the nominal grand total obligation under the consent decree is significant: US$409.9 million − US$251.4 million = US$158.5 million. This shortfall will need to be addressed through a combination of reserve adjustments, charges to earnings, and potential recoveries from insurance and other sources, as discussed further in Section VI below.
III. Analysis of Covenant Provisions Potentially Triggered by the Consent Decree
This Section presents a detailed analysis of the specific covenant provisions in the RCF that may be implicated by TMC's obligations under the consent decree. For each covenant category, we assess the risk level, identify the specific consent decree obligation or transaction that may trigger the covenant, and recommend a course of action.
A. Environmental Liability Covenant
The RCF contains a financial covenant restricting TMC's aggregate environmental liabilities to 25% of Consolidated Net Tangible Assets. This covenant, set forth in Section 7.15 of the Credit Agreement, is a fundamental protection for the lending syndicate against the risk that environmental obligations could materially impair TMC's asset base and its ability to service its credit obligations. The covenant is tested quarterly, based on TMC's most recently delivered financial statements and the accompanying compliance certificate.
Current Compliance Status. As demonstrated in the calculations presented in Section II.C above, TMC's total environmental liabilities, inclusive of the consent decree obligations, are approximately C$554.4 million, measured against the covenant threshold of C$980.0 million. This yields headroom of approximately C$425.6 million, representing a cushion of approximately 43.4% of the threshold amount. On its face, this is substantial headroom, and we do not believe that the consent decree obligations, standing alone, jeopardize compliance with this covenant in the near term.
Risks to Monitor. Notwithstanding the current headroom, we have identified several factors that could erode the covenant cushion over time and that warrant ongoing monitoring:
(i) Remediation Cost Escalation. The remediation cost estimates reflected in the consent decree are, by their nature, projections. The most significant source of cost risk is the Ridgecrest site, where the 30-year remediation timeline introduces substantial uncertainty. As noted above, the EPA's initial estimate for Ridgecrest was $224.0 million, while TMC's internal estimate was $187.5 million. The negotiated figure of $198.6 million represents a midpoint, but the consent decree includes provisions for remedy modification and cost recovery that could increase TMC's obligations if site conditions prove more challenging than anticipated, if new contamination is discovered, or if regulatory standards become more stringent during the remediation period. A cost increase of even 15–20% at Ridgecrest alone would add approximately $30–$40 million to TMC's environmental liabilities.
(ii) Foreign Exchange Risk. The environmental liabilities arising under the consent decree are denominated in U.S. dollars, while the RCF covenant is measured in Canadian dollars. At the current exchange rate of C$1 = US$0.7394, the US$409.9 million in consent decree obligations translates to approximately C$554.4 million. However, a weakening of the Canadian dollar — for example, to C$1 = US$0.70 — would increase the Canadian dollar equivalent to approximately C$585.6 million, consuming an additional C$31.2 million of covenant headroom. Given the historical volatility of the CAD/USD exchange rate, this risk is not trivial over the remaining term of the Credit Facility.
(iii) Measurement Methodology — Nominal vs. NPV. The environmental liability covenant requires measurement of "aggregate environmental liabilities" as defined in the Credit Agreement. The definition cross-references liabilities that are "probable and estimable" under GAAP, which under ASC 450 and IAS 37 generally requires booking at an undiscounted amount unless specific guidance permits or requires discounting. If the covenant captures the nominal remediation figure of $343.5 million rather than the net present value figure of $245.1 million, the total liabilities booked against the covenant would be higher. The difference between the nominal and NPV figures — approximately $98.4 million — is material. We recommend confirming the measurement methodology with Ridgeline Accounting Partners LLP and ensuring consistency between the covenant compliance certificate and the financial statements.
(iv) Additional Environmental Liabilities. TMC currently operates 14 mines and 6 chemical processing facilities globally. The consent decree addresses only four sites. If additional environmental liabilities emerge at other TMC operations — whether through regulatory action, voluntary disclosure, or litigation — these would be additive to the covenant calculation. TMC's environmental risk profile is not static, and the Company's ongoing operations in jurisdictions with evolving environmental regulatory regimes (including Canada, Australia, Chile, and the United States) present an ongoing risk of additional liability recognition.
Conclusion. No amendment or waiver of the environmental liability covenant is currently required. TMC's headroom of C$425.6 million provides a meaningful buffer. However, we recommend that TMC conduct quarterly sensitivity analyses of the environmental liability covenant, incorporating updated cost estimates, exchange rate assumptions, and any newly identified environmental liabilities. The results of these analyses should be shared with this firm and with Northspire to inform ongoing credit facility management.
B. Negative Pledge / Lien Restrictions
The RCF contains a negative pledge covenant (Section 7.01 of the Credit Agreement) prohibiting TMC and its subsidiaries from creating, incurring, assuming, or permitting to exist any lien, security interest, mortgage, pledge, charge, or other encumbrance on any of their respective properties or assets, except for specifically enumerated categories of "Permitted Liens" defined in Section 1.01 of the Credit Agreement. The negative pledge is a standard protective covenant in syndicated credit facilities and is designed to ensure that the lending syndicate's claim on TMC's asset base is not subordinated to or diluted by competing secured creditors.
This covenant is the provision most likely to be implicated by the consent decree's financial assurance requirements, and we assess the risk level as high. The analysis proceeds in two parts: the surety bond indemnity agreement and the remediation trust fund.
1. Surety Bond Indemnity Agreement (GAI) Analysis
As described in Section II.B above, the $165.0 million surety bond to be issued by Ironbark Surety of America, Inc. is conditioned upon the execution of a General Agreement of Indemnity (the "GAI") by TMC and its subsidiary, Torchlight Mining (U.S.) Inc. The GAI is a standard instrument in the surety industry and typically includes the following provisions that are relevant to the negative pledge analysis:
(a) Indemnity Obligation. The GAI will require TMC and Torchlight Mining (U.S.) Inc. to indemnify Ironbark against any and all losses, costs, expenses, and liabilities arising from or in connection with the surety bond, including any amounts paid by Ironbark to the obligee (EPA) under the bond. This indemnity creates a direct payment obligation that is triggered if Ironbark is called upon to perform under the bond.
(b) Right of Subrogation. The GAI will typically grant Ironbark a right of subrogation, entitling it to step into the rights of the obligee (EPA) with respect to any claims against TMC and its assets.
(c) Security Interest / Collateral. This is the critical provision for purposes of the negative pledge analysis. In many surety bond transactions, particularly those involving bonds of the magnitude contemplated here ($165.0 million), the surety requires the principal (TMC) to grant a security interest in certain assets as collateral for the indemnity obligation. The nature and scope of this security interest varies by transaction but may include:
• A security interest in the assets that are the subject of the bonded obligation (i.e., the remediation sites and related assets);
• A pledge of, or assignment of rights under, the remediation trust fund or other financial assurance instruments;
• A floating lien on specified categories of assets (e.g., accounts receivable, inventory, equipment);
• A security interest in funds deposited with the surety or in a collateral account; or
• A negative pledge running in favor of the surety, restricting TMC's ability to grant liens to other creditors.
Any of these security interests, if granted, would constitute a "lien" or "encumbrance" within the meaning of the Credit Agreement's negative pledge covenant.
(d) Collateral Deposit Requirements. In addition to any blanket security interest, the GAI may require TMC to post cash collateral or letters of credit in specified amounts or upon the occurrence of specified trigger events (such as a deterioration in TMC's financial condition or a claim under the bond). Such collateral deposits could implicate both the negative pledge covenant and the restricted payments/investments covenant.
Analysis of Permitted Lien Carve-Outs. The negative pledge covenant in the RCF includes a set of enumerated exceptions for "Permitted Liens." These exceptions typically include, among others:
• Purchase money security interests securing the acquisition cost of specific assets, subject to a dollar cap;
• Liens arising by operation of law, including carriers', warehousemen's, mechanics', materialmen's, repairmen's, and other like liens;
• Liens for taxes, assessments, and other governmental charges not yet due or being contested in good faith;
• Liens securing obligations under workers' compensation laws, unemployment insurance, or similar legislation;
• Statutory or regulatory liens in favor of governmental authorities (which may or may not be drafted broadly enough to cover environmental financial assurance liens);
• Easements, rights-of-way, restrictions, and other similar encumbrances on real property that do not materially interfere with the use thereof;
• Liens existing on the date of the Credit Agreement (scheduled liens); and
• A general "basket" for other liens not otherwise permitted, subject to a dollar cap (the amount of which must be verified).
The critical question is whether the RCF includes a specific carve-out for liens granted in connection with surety bonds, performance bonds, or financial assurance instruments required by governmental authorities or court orders. In our experience, some syndicated credit facilities include such a carve-out — often phrased as an exception for "liens securing bonds, surety obligations, or similar obligations incurred in the ordinary course of business or as required by applicable law or governmental order" — while others do not. We have requested a complete copy of the Credit Agreement, including all amendments and supplements to date, to conduct the specific textual analysis required, and we expect to complete this review by March 15, 2025.
If the RCF does not include a carve-out that clearly covers the security interest and collateral obligations contemplated by the Ironbark GAI, then the execution of the GAI — and, in particular, the granting of any security interest or collateral pledge — would constitute a violation of the negative pledge covenant. In that event, TMC would need to obtain either:
(a) An amendment to the Credit Agreement adding a specific permitted lien carve-out for liens granted in connection with surety bonds or other financial assurance instruments required by governmental authorities, courts, or consent decrees, with appropriate parameters (e.g., a dollar cap or limitation to liens securing environmental remediation obligations); or
(b) A waiver from the Required Lenders (66⅔% of aggregate commitments) permitting the specific lien or security interest contemplated by the Ironbark GAI on a one-time basis.
We generally recommend pursuing an amendment rather than a waiver, for several reasons. First, an amendment provides permanent flexibility for future surety bond renewals and potential additional environmental financial assurance requirements. Second, an amendment is cleaner from a documentation perspective and eliminates the need for repeated waiver requests as the surety bond is renewed annually. Third, a well-drafted amendment can be structured to address not only the surety bond lien but also the remediation trust fund issues discussed below, consolidating the lender engagement into a single process.
2. Remediation Trust Fund Considerations
The $80.0 million deposit to the Larchfield Trust Company, N.A. remediation trust fund presents a related but analytically distinct set of negative pledge issues. If the trust is structured as irrevocable and the trust assets are beyond TMC's control — as is typically required by EPA for CERCLA remedial action trusts — then the deposit effectively removes $80.0 million in cash from TMC's unencumbered asset base. This raises several concerns under the Credit Agreement:
(i) The irrevocable nature of the trust may itself constitute an "encumbrance" on TMC's assets within the meaning of the negative pledge, even if no formal security interest is granted. The Credit Agreement's definition of "Lien" should be reviewed to determine whether it captures irrevocable trust deposits or restrictions on the use of cash.
(ii) The trust structure may implicate any restricted cash provisions in the Credit Agreement. If the covenant compliance calculations exclude restricted cash from the determination of CNTA or other financial metrics, the deposit could have a secondary effect on TMC's covenant compliance.
(iii) The trust deposit of $80.0 million converts to approximately C$108.2 million at the current exchange rate (US$80.0 million ÷ 0.7394). This is a substantial sum that the RCF lenders may view as a material reduction in TMC's unencumbered liquidity.
Conclusion on Negative Pledge. The negative pledge covenant is the provision most likely to require attention in connection with the consent decree's financial assurance requirements. We recommend the following immediate steps:
(a) Review the specific terms of the GAI with Ironbark's account executive, Thomas Rennick, to understand the precise nature and scope of any security interest or collateral requirements before TMC executes the GAI. If possible, TMC should negotiate the GAI to minimize the scope of any lien — for example, limiting the security interest to the remediation trust assets or to specific site-related assets, rather than a blanket lien on TMC's general assets.
(b) Complete the line-by-line review of the Credit Agreement's negative pledge covenant and "Permitted Liens" definition to determine whether any existing carve-out covers the GAI and trust arrangements.
(c) If no adequate carve-out exists, prepare and present a limited amendment request to Harborstone and the syndicate, as described in Section IV.B below.
C. Permitted Indebtedness Definitions
The RCF contains an indebtedness covenant (Section 7.02 of the Credit Agreement) that restricts TMC and its subsidiaries from incurring, creating, assuming, or suffering to exist "Indebtedness" (as defined in the Credit Agreement) in excess of specified amounts and subject to specified exceptions. The definition of "Indebtedness" in syndicated credit facilities is typically broad and includes not only funded borrowings but also guarantees, surety obligations, reimbursement obligations, capital lease obligations, and other contingent payment obligations.
The following consent decree obligations are assessed for their treatment under the permitted indebtedness covenant:
Civil Penalties ($31.5 million). The civil penalties imposed by the consent decree are obligations payable to the United States and the State of Montana in their governmental capacities. Civil penalties are generally not captured under the definition of "Indebtedness" in credit agreements, as they are not incurred in connection with borrowed money, the extension of credit, or a guarantee thereof. Rather, they are regulatory sanctions arising from TMC's legal obligations. We have reviewed the standard formulations of "Indebtedness" used in comparable syndicated facilities and believe that the civil penalty obligation would not constitute "Indebtedness." However, this conclusion should be confirmed against the specific definition in the Harborstone Credit Agreement.
EPA Past-Costs Reimbursement ($18.1 million). The reimbursement of EPA past costs under CERCLA § 107 is likewise a governmental obligation arising by operation of statute. It is an obligation to reimburse the government for costs already incurred, not an extension of credit. For the same reasons as the civil penalty, we believe the past-costs reimbursement should not constitute "Indebtedness," though confirmation against the Credit Agreement is warranted.
Surety Bond Indemnity Obligation ($165.0 million). This is the obligation that presents the most significant risk under the permitted indebtedness covenant. The definition of "Indebtedness" in syndicated credit facilities commonly includes, among other categories:
• obligations under guarantees, suretyships, or similar arrangements pursuant to which the obligor has agreed to be responsible for the indebtedness or other obligations of another person;
• reimbursement obligations arising from letters of credit, surety bonds, or similar instruments; and
• contingent obligations to pay, purchase, or provide funds for the payment or performance of obligations of another person.
If the Ironbark surety bond creates an indemnity obligation under the GAI pursuant to which TMC agrees to reimburse Ironbark for any amounts paid under the bond, that indemnity obligation could be characterized as a contingent indebtedness or guaranty obligation falling within the definition of "Indebtedness." At its face amount, this obligation is $165.0 million — a substantial sum that could consume a significant portion of any general permitted indebtedness basket.
Permitted Indebtedness Basket Analysis. Syndicated credit facilities typically include a general basket for permitted indebtedness not otherwise specifically authorized, often expressed as a fixed dollar amount or a percentage of CNTA. The size of this basket in the Harborstone RCF must be reviewed to determine whether it has sufficient capacity to accommodate a $165.0 million contingent obligation in addition to TMC's other existing indebtedness. If the basket is insufficient — or if the surety bond indemnity does not clearly fit within any existing permitted indebtedness category — TMC would need to seek an amendment to add a specific carve-out for environmental financial assurance instruments.
Alternatively, some credit agreements include a specific carve-out for government-mandated financial assurance obligations, which would encompass surety bonds required by consent decrees, regulatory orders, or environmental permits. If such a carve-out exists in the Harborstone Credit Agreement, the surety bond indemnity may already be accommodated.
Conclusion. The permitted indebtedness covenant presents a moderate risk of being triggered by the surety bond indemnity obligation under the Ironbark GAI. We recommend a detailed review of the Credit Agreement's definition of "Indebtedness" and the permitted indebtedness baskets to determine the current capacity and whether a specific carve-out for environmental financial assurance instruments is needed. If the existing baskets are insufficient, this issue can be addressed in the same amendment package as the negative pledge carve-out described in Section III.B.
D. Material Adverse Change / Material Adverse Effect Representations and Covenants
The RCF very likely includes a repeating representation (Section 5.08 or equivalent of the Credit Agreement) to the effect that, since the date of the most recent audited financial statements delivered to the Agent, no event, circumstance, or condition has occurred that, individually or in the aggregate, has had or could reasonably be expected to have a "Material Adverse Effect" (as defined in the Credit Agreement) on TMC's business, operations, financial condition, or ability to perform its obligations under the Credit Agreement. This representation is made on each borrowing date and each date on which a compliance certificate is delivered, and a breach of this representation could constitute an Event of Default under the Credit Agreement.
The definition of "Material Adverse Effect" varies by credit agreement but typically encompasses any event, condition, or change that has had, or could reasonably be expected to have, a material adverse effect on: (a) the business, operations, property, or financial condition of the Borrower and its subsidiaries taken as a whole; (b) the ability of the Borrower to perform its obligations under the Loan Documents; or (c) the rights and remedies of the Agent and the Lenders under the Loan Documents.
Assessment. The consent decree involves aggregate obligations of $409.9 million nominal, with an estimated shortfall of US$158.5 million beyond TMC's current environmental remediation reserve. This shortfall is material in absolute terms and will necessitate an increase in TMC's environmental liability reserves, with a corresponding charge to earnings. However, we believe that the consent decree, on balance, should not independently constitute a Material Adverse Effect for the following reasons:
(i) Scale of TMC's Operations. TMC is a large, diversified mining and chemical processing company with FY2023 revenue of C$4.82 billion, EBITDA of C$1.14 billion, and a market capitalization of approximately C$7.6 billion. The consent decree obligations, even at their nominal total of $409.9 million, represent approximately 8.5% of TMC's revenue, 36% of EBITDA (on a nominal basis), and 5.4% of market capitalization. While not insignificant, these ratios are within the range that courts and tribunals have generally found insufficient to constitute a material adverse effect, particularly where the obligations are spread over an extended time period (up to 30 years for Ridgecrest).
(ii) Negotiated Resolution. The consent decree is a voluntarily negotiated settlement that resolves significant litigation risk and regulatory uncertainty. Prior to the consent decree, TMC faced the possibility of a contested enforcement action with potentially far greater financial exposure, including treble damages under certain CERCLA provisions, stipulated penalties for ongoing violations, and the risk of a court-imposed remedy more costly than the negotiated outcome. The settlement itself is a known quantity that arguably reduces — rather than increases — the uncertainty surrounding TMC's environmental liabilities.
(iii) Structured Payment Profile. The consent decree obligations are spread over an extended period, with remediation costs incurred over 15 to 30 years depending on the site. The near-term cash outlays (trust deposit, first penalty installment, past-costs reimbursement) are manageable relative to TMC's liquidity position and cash-generating capacity.
(iv) Existing Reserves. TMC has already established an environmental remediation reserve of C$340.0 million (approximately US$251.4 million) on its balance sheet. This reserve demonstrates that the markets and the Company's auditors have already recognized a substantial portion of the environmental liabilities, and the consent decree merely crystallizes and quantifies obligations that were, in many cases, already reflected (at least partially) in TMC's financial statements.
(v) Insurance Recoveries. TMC has pending insurance claims under its environmental insurance policy with Meridian Environmental Insurance Company (Policy No. MEI-ENV-2021-04738). Meridian has acknowledged coverage for the Gallatin and Bonanza Creek sites, subject to the self-insured retention of $5.0 million per occurrence. Estimated net recoveries of $45.0 million to $55.0 million could further offset TMC's net environmental liability exposure, though the timing and amount of recovery remain subject to the pending coverage dispute.
Conclusion. We assess the risk that the consent decree would independently trigger the MAE representation as low. However, we recognize that this is ultimately a factual determination that the Agent and the Required Lenders retain the right to evaluate independently. To mitigate any risk, we recommend that TMC:
(a) Prepare a supporting analysis of the consent decree's financial impact, placing the obligations in the context of TMC's overall financial profile, existing reserves, and structured payment timeline;
(b) Include proactive and transparent disclosure of the consent decree in the next compliance certificate, with a narrative explanation of why the consent decree does not constitute an MAE; and
(c) Ensure consistency between the compliance certificate disclosure, the Disclosure Letter sent to Harborstone on March 1, 2025, and any public filings (including the Form 20-F and quarterly reports).
E. Reporting and Notification Covenants
The RCF contains affirmative covenants (Section 6.02 and related provisions of the Credit Agreement) requiring TMC to provide the Agent with timely notification of certain material events and to deliver specified documents and compliance certificates on a periodic basis. The relevant affirmative covenants likely include the following:
(i) Prompt Notification. TMC is required to promptly notify the Agent of any material litigation, material regulatory action, or material environmental liability that could reasonably be expected to have a Material Adverse Effect or that involves potential liability in excess of a specified dollar threshold.
(ii) Delivery of Material Governmental Orders. TMC is required to deliver to the Agent copies of any material governmental order, consent decree, injunction, or judgment entered against TMC or any subsidiary.
(iii) Periodic Compliance Certificates. TMC is required to deliver quarterly compliance certificates to the Agent, certifying compliance with the financial and other covenants contained in the Credit Agreement and disclosing any events of default or potential events of default.
(iv) Annual Financial Statements and Auditor's Reports. TMC is required to deliver annual audited financial statements and quarterly unaudited financial statements to the Agent, together with accompanying management discussion and analysis.
Assessment. TMC has already taken the most important step with respect to the reporting and notification covenants: the Disclosure Letter sent to Harborstone on March 1, 2025 provides formal notice of the consent decree and the associated environmental liabilities. This letter was prepared by this firm in coordination with TMC's Treasury Department and satisfies the prompt notification obligation under the Credit Agreement.
In addition to the Disclosure Letter, TMC should take the following steps to ensure full compliance with the reporting covenants:
(a) Deliver the Consent Decree. TMC should deliver a copy of the execution version of the consent decree (lodged with the Court on February 19, 2025) to Harborstone promptly upon entry by the Court. If the Agent requests a copy prior to entry, TMC should deliver the lodged version with a notation that it remains subject to public comment and judicial approval.
(b) Deliver Financial Assurance Documents. Upon execution of the surety bond and the remediation trust agreement, TMC should deliver copies of these instruments (and the GAI, to the extent required by the Credit Agreement) to Harborstone.
(c) Finalize and Deliver Compliance Certificate. The draft covenant compliance certificate dated February 25, 2025 should be finalized — incorporating the consent decree obligations into the covenant calculations — and delivered with the next scheduled compliance certificate delivery. The compliance certificate should include a clear and accurate calculation of the environmental liability covenant, using the measurement methodology consistent with GAAP and the Credit Agreement definitions.
Conclusion. No amendment or waiver is needed with respect to the reporting and notification covenants. TMC's compliance obligations are affirmative in nature and can be satisfied through timely disclosure and document delivery. The Disclosure Letter dated March 1, 2025 represents an appropriate first step, and the remaining deliverables should be managed in the ordinary course.
F. Restricted Payments and Investments Covenants
The RCF likely contains covenants (Sections 7.05 and 7.06 of the Credit Agreement, or equivalent provisions) restricting TMC's ability to make "Restricted Payments" (typically defined to include dividends, share repurchases, and other distributions to equity holders) and "Investments" (typically defined to include loans, advances, equity contributions, and acquisitions, as well as deposits and contributions to trusts or special-purpose vehicles).
Assessment. Two components of the consent decree may implicate these covenants:
Remediation Trust Fund Deposit ($80.0 million). The deposit of $80.0 million to the Larchfield Trust Company remediation trust raises the question of whether this deposit constitutes an "Investment" under the Credit Agreement. If the Credit Agreement defines "Investment" broadly to include any deposit, contribution, or transfer of cash or assets to any trust, escrow, fund, or similar arrangement — other than deposits in the ordinary course of business — then the trust deposit could technically fall within this definition. The irrevocable nature of the trust, which places the funds beyond TMC's control and subjects disbursements to EPA approval, strengthens the argument that this is a disposition of assets or an investment rather than simply a cash management arrangement.
However, there is a strong argument that the trust deposit should be treated as a mandatory expenditure required by court order rather than a voluntary investment. The deposit is not being made at TMC's discretion; it is a legally compelled obligation under the consent decree, enforceable through the contempt power of the federal court. Many credit agreements recognize this distinction by excluding from the definition of "Investment" or "Restricted Payment" any payment or transfer required by order of a court of competent jurisdiction or by applicable law. The availability of this exclusion in the Harborstone Credit Agreement must be confirmed.
Supplemental Environmental Projects ($12.0 million). The $12.0 million in SEP commitments may also be characterized as "Investments" or, alternatively, as capital expenditures. The SEPs involve the funding of specific projects — the Flint Creek Watershed Restoration Project, the Battle Mountain Community Drinking Water Project, and the Institute Community Air Quality Monitoring Project — that benefit third-party communities and are not directly related to TMC's core business operations. While the SEPs are mandated by the consent decree, their community-benefit character may cause them to be viewed as charitable contributions or non-core investments rather than ordinary business expenditures.
Conclusion. We assess the risk level as moderate. The remediation trust deposit is the more significant concern due to its size (C$108.2 million equivalent). We recommend confirming the characterization of both the trust deposit and the SEP commitments under the Credit Agreement definitions, and seeking a specific carve-out or clarification from the lending syndicate if the existing provisions do not clearly accommodate these payments.
G. Capital Expenditure Limitations
Certain syndicated credit facilities include a covenant limiting the annual capital expenditures of the borrower and its subsidiaries to a specified amount or formula-based threshold. If the Harborstone Credit Agreement contains such a limitation, the near-term cash outflows associated with the consent decree could potentially implicate this covenant.
Assessment. Northspire Capital Markets' preliminary cost modeling suggests that TMC will face significant near-term cash demands related to the consent decree, including:
• $80.0 million remediation trust fund deposit (due by September 12, 2025);
• $7.875 million first civil penalty installment (due by July 14, 2025);
• $18.1 million EPA past-costs reimbursement (timing to be confirmed, likely within 60 days of decree entry);
• $3.0525 million first annual surety bond premium (due upon bond issuance, estimated Q3 2025);
• Initial remediation mobilization costs at Ridgecrest and Bonanza Creek (estimated $15–$25 million in the first year); and
• Independent monitor costs of approximately $960,000 (first annual payment).
In aggregate, these near-term obligations total approximately $125–$135 million in the first year following the Effective Date. While a substantial portion of these costs (particularly the trust deposit and the past-costs reimbursement) are one-time expenditures that would not recur annually, they could strain TMC's capital expenditure capacity if a capex covenant is in place.
The classification of these expenditures as "capital expenditures" versus "operating expenditures" is relevant. Remediation costs are generally treated as operating expenses for accounting purposes (unless they involve the acquisition of long-lived assets or betterments to existing assets), while the trust fund deposit may be classified as a non-operating cash outflow. The capex covenant definition in the Credit Agreement may or may not capture all of these categories.
Conclusion. The risk level is low to moderate, depending on whether the RCF contains a capex limitation and whether remediation expenditures are carved out from the definition of "Capital Expenditures." We recommend reviewing the Credit Agreement to determine whether such a covenant exists and, if so, whether the consent decree obligations fall within its scope.
IV. Summary of Potential Covenant Triggers and Recommended Actions
A. Summary Table
The following table summarizes the potential covenant triggers, risk levels, and recommended actions identified in Section III:
B. Recommended Course of Action
Based on the analysis set forth above, we recommend the following course of action, organized by priority and timeline:
1. Immediate Step — Complete Credit Agreement Review. As a threshold matter, Calderwood & Harkness should complete a comprehensive, line-by-line review of the RCF's negative covenants, permitted lien baskets, permitted indebtedness definitions, restricted payment provisions, and any capital expenditure limitations. This review should be conducted against the specific mechanics of the surety bond GAI (Ironbark), the remediation trust agreement (Larchfield), and the consent decree payment obligations. We have requested complete copies of the Credit Agreement, all amendments and supplements, and the related security documents from TMC's Treasury Department, and we anticipate completing this review by March 15, 2025. The review should also encompass the definitions of "Indebtedness," "Lien," "Permitted Liens," "Investment," "Restricted Payment," "Capital Expenditure," and "Material Adverse Effect" to ensure that our preliminary analysis is consistent with the specific contractual language.
2. Engagement with Ironbark on GAI Terms. Calderwood & Harkness should coordinate with Thomas Rennick, account executive at Ironbark Surety of America, Inc., to obtain a draft of the GAI and understand the precise nature and scope of any security interest or collateral requirements. Ideally, this coordination should occur before TMC executes the GAI so that the GAI's lien provisions can be structured to minimize conflict with the Credit Agreement's negative pledge covenant. For example, if the GAI can be structured to rely on the remediation trust fund assets as the primary collateral rather than a blanket lien on TMC's general assets, this would narrow the scope of any amendment needed from the lending syndicate. We recommend scheduling an initial call with Ironbark during the week of March 10, 2025, with the objective of obtaining a draft GAI by March 20, 2025.
3. Proactive Lender Engagement. TMC should initiate preliminary discussions with Harborstone National Bank, N.A. — both in its capacity as Administrative Agent and as a relationship lender — to preview the potential need for a limited amendment or consent under the Credit Agreement. The objective of this initial engagement is to:
(a) Confirm Harborstone's receipt and review of the Disclosure Letter dated March 1, 2025;
(b) Brief Harborstone on the consent decree's key financial terms and the financial assurance requirements;
(c) Preview the potential need for a limited amendment to the permitted lien and permitted indebtedness provisions;
(d) Gauge Harborstone's initial receptivity to such an amendment and identify any potential concerns or conditions; and
(e) Establish a timeline and process for obtaining the requisite lender consents.
This engagement should leverage TMC's existing strong relationship with Harborstone and emphasize the positive aspects of the consent decree — particularly the substantial headroom under the environmental liability covenant, the structured and long-term payment profile, and the fact that the settlement reduces rather than increases TMC's overall environmental risk profile. We recommend scheduling an introductory call with the Harborstone relationship team during the week of March 10, 2025.
4. Amendment vs. Waiver Decision. Based on the results of the Credit Agreement review and the Ironbark GAI analysis, TMC and Calderwood & Harkness should determine whether the appropriate remedy is a formal amendment to the Credit Agreement or a one-time written waiver from the Required Lenders. Our preliminary view is as follows:
(a) For the negative pledge carve-out, we recommend pursuing a formal amendment rather than a waiver. The amendment should add a specific exception to the "Permitted Liens" definition for liens granted in connection with surety bonds, performance bonds, or other financial assurance instruments required by governmental authorities, courts, or consent decrees in connection with environmental remediation obligations. An amendment provides permanent flexibility and avoids the need for repeated waiver requests as the surety bond is renewed annually or if additional financial assurance is required in the future.
(b) For the permitted indebtedness carve-out, if required, this can be addressed in the same amendment package as the negative pledge carve-out, adding a specific exception for contingent indebtedness arising from environmental financial assurance instruments.
(c) For the remediation trust fund deposit, if the trust deposit is determined to implicate the restricted payments/investments covenant, a one-time waiver may be sufficient, given that the deposit is a non-recurring event. However, if the amendment is already being pursued, it may be more efficient to include a specific exception for court-ordered or government-mandated trust deposits in the amendment package.
5. Timeline. The critical external deadline driving this analysis is the September 12, 2025 financial assurance posting deadline under the consent decree. Any amendment or waiver process must be completed before this date to ensure that TMC can execute the GAI, issue the surety bond, and fund the remediation trust without violating the Credit Agreement. Syndicate lender consent processes typically require 30 to 60 days from the date the amendment request is circulated to the lending group, and potentially longer if the amendment is contentious or if individual lender negotiations are required. Working backward from the September 12, 2025 deadline, and allowing a reasonable buffer for delays, we recommend the following timeline:
• Complete Credit Agreement review: March 15, 2025
• Obtain draft GAI from Ironbark and analyze lien implications: March 20, 2025
• Prepare amendment term sheet for Harborstone: April 1, 2025
• Introductory call with Harborstone relationship team: Week of March 10, 2025
• Circulate formal amendment request to Harborstone: April 15, 2025
• Harborstone review and initial feedback: April 15 – May 15, 2025
• Circulate amendment to syndicate lenders for consent: May 15, 2025
• Obtain Required Lender consent: June 15 – July 15, 2025
• Execute amendment: July 15, 2025
• Buffer period before financial assurance deadline: July 15 – September 12, 2025