environmental-covenant-compliance-memo.docx

1039-00003 · Torchlight Mining Corp · Credit Facility & Financial Impact

environmental-covenant-compliance-memo.docx DOCUMENT Antitrust

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MEMORANDUM

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

FROM: Harrison Wexford, Calderwood & Harkness LLP Beatrice Holloway, Calderwood & Harkness LLP Elliot Nguyen, Calderwood & Harkness LLP

DATE: November 18, 2024

RE: Analysis of Environmental Liability Covenant Compliance Under Syndicated Revolving Credit Facility (Agent: Harborstone National Bank, N.A.)

Matter No.: 1039-00003

I. Executive Summary

This memorandum analyzes whether the environmental liabilities arising from the pending EPA/DOJ enforcement action, United States et al. v. Torchlight Mining Corp. et al., Civil Action No. 9:24-cv-00087-DWM (D. Mont.), and the anticipated obligations under the consent decree currently being negotiated, will cause Torchlight Mining Corp. ("TMC" or the "Company") to breach the environmental liability covenant contained in its C$750.0 million syndicated revolving credit facility (the "RCF"). The RCF is administered by Harborstone National Bank, N.A. (the "Agent" or "Harborstone") and matures on March 15, 2027.

The key covenant at issue provides that TMC's aggregate disclosed and undisclosed environmental liabilities shall not exceed twenty-five percent (25%) of its consolidated net tangible assets ("CNTA"). Based on TMC's most recently filed Form 10-Q for the quarter ended September 30, 2024 (the "Q3 2024 10-Q"), the Company's CNTA stands at approximately C$3.92 billion, yielding a covenant threshold of C$980.0 million (approximately US$724.4 million at the current exchange rate of C$1.00 = US$0.7394).

We have conducted a comprehensive analysis of TMC's aggregate environmental liabilities across all four sites implicated in the EPA/DOJ enforcement action — the Ridgecrest Copper-Molybdenum Mine (Montana), Gallatin Chemical Works (Montana), Bonanza Creek Gold Mine (Nevada), and Kanawha Bend Chemical Plant (West Virginia). Our analysis encompasses remediation obligations, civil penalties, EPA past-costs reimbursement, supplemental environmental project ("SEP") commitments, and independent monitor costs. In the aggregate, these liabilities total approximately US$409.9 million on a nominal basis, equivalent to approximately C$554.4 million at the current exchange rate.

Measured against the covenant threshold of C$980.0 million, TMC maintains significant headroom of approximately C$425.6 million, even under the most conservative calculation methodology. The Company is currently in compliance with the environmental liability covenant, and we do not anticipate a breach under current projections.

However, several risk factors could erode this headroom over time, including potential CNTA erosion due to asset impairments or commodity price declines, escalation of remediation costs beyond negotiated estimates, unfavorable movements in the CAD/USD exchange rate, and the potential incurrence of stipulated penalties under the consent decree. Additionally, the financial assurance instruments required by the consent decree — a $165.0 million surety bond and an $80.0 million remediation trust fund — warrant careful analysis under the RCF's negative covenant provisions regarding permitted liens, permitted indebtedness, and restricted payments.

We recommend that TMC undertake proactive disclosure to Harborstone, prepare an updated compliance certificate for delivery upon or shortly after consent decree entry, and implement an ongoing quarterly monitoring protocol to ensure continued compliance through the RCF's maturity. These recommendations, together with additional steps regarding reserve adequacy, insurance recovery, and contingency planning, are set forth in detail in Section IX below.

II. Background

A. The Revolving Credit Facility

On March 15, 2022, TMC, as borrower, entered into a C$750.0 million Senior Secured Syndicated Revolving Credit Facility Agreement (the "Credit Agreement") with Harborstone National Bank, N.A., as administrative agent, and a syndicate of lenders comprising seven financial institutions (the "Lenders"). The Credit Agreement provides TMC with a revolving line of credit that may be drawn in Canadian dollars or United States dollars, subject to customary borrowing base limitations, financial covenants, and conditions precedent to each borrowing. The facility matures on March 15, 2027.

The Credit Agreement is guaranteed on a joint and several basis by the following wholly owned domestic subsidiaries of TMC (collectively, the "Guarantors"):

(a) Torchlight Mining (U.S.) Inc. (EIN: 83-2047156), a Delaware corporation and TMC's principal U.S. operating subsidiary;

(b) Torchlight Specialty Chemicals, Inc. (EIN: 47-3819204), a Delaware corporation that operates TMC's specialty chemical manufacturing business in the United States;

(c) Ridgecrest Mine Holdings, LLC (Montana Secretary of State ID: E1042738), a Montana limited liability company that holds the Ridgecrest Copper-Molybdenum Mine and related mineral rights; and

(d) Bonanza Creek Mining, LLC (Nevada Secretary of State Entity No.: E0518294731), a Nevada limited liability company that holds the Bonanza Creek Gold Mine and related mining claims.

The Credit Agreement contains a comprehensive set of affirmative and negative covenants customary for syndicated credit facilities of this nature, including financial covenants relating to leverage ratios, interest coverage, and minimum liquidity, as well as negative covenants restricting the incurrence of additional indebtedness, the creation of liens, the making of restricted payments, and the disposition of assets. Of particular relevance to this memorandum, Article VII (Negative Covenants) of the Credit Agreement contains a specific environmental liability covenant (the "Environmental Liability Covenant"), which is analyzed in detail in Section III below.

The Credit Agreement also imposes certain affirmative obligations with respect to environmental matters, including requirements to maintain compliance with applicable environmental laws in all material respects, to promptly notify the Agent of any material environmental claims or litigation, and to deliver periodic compliance certificates certifying the Company's continued satisfaction of all financial and environmental covenants. These disclosure and notification obligations are discussed in Section VIII below.

As of the date of this memorandum, TMC has approximately C$312.5 million drawn under the RCF, leaving approximately C$437.5 million of undrawn availability. The Company's ability to maintain this borrowing capacity through the RCF's maturity is dependent, among other things, on continued compliance with the Environmental Liability Covenant.

B. The EPA/DOJ Enforcement Action

On January 18, 2024, the United States, acting on behalf of the Environmental Protection Agency ("EPA") and through the Department of Justice ("DOJ"), together with the States of Montana, Nevada, and West Virginia (collectively, the "Plaintiffs"), filed a multi-count civil enforcement complaint against TMC and each of the Guarantors (collectively, the "Defendants") in the United States District Court for the District of Montana, Missoula Division. The case is captioned United States of America et al. v. Torchlight Mining Corp. et al., Civil Action No. 9:24-cv-00087-DWM, and is assigned to the Honorable Donald W. Molloy, Senior United States District Judge.

The complaint alleges violations of the Clean Water Act ("CWA") Section 301 (unauthorized discharges of pollutants into waters of the United States), the Resource Conservation and Recovery Act ("RCRA") Sections 3004 and 3005 (violations of hazardous waste management standards and permitting requirements), and the Comprehensive Environmental Response, Compensation, and Liability Act ("CERCLA") Section 107 (liability for response costs at contaminated sites). The allegations span operations at four separate facilities across three states, as described in Section II.C below.

Following extensive motion practice and an initial case management conference, the parties entered into mediation under the supervision of Magistrate Judge Jeremiah C. Lynch. On July 30, 2024, the parties reached an agreement in principle on the framework for a consent decree that would resolve all claims in the enforcement action. The principal terms of the agreement in principle include remediation obligations at all four sites, the payment of civil penalties, reimbursement of EPA past costs, commitments to fund supplemental environmental projects, and the appointment of an independent environmental monitor. The parties are currently engaged in the process of reducing the agreement in principle to a final consent decree, which is anticipated to be lodged with the court for public notice and comment in the first quarter of 2025, with a target entry date of May 15, 2025.

Calderwood & Harkness LLP ("C&H") was engaged by TMC on October 21, 2024, to assist in the finalization of consent decree negotiations, to prepare and review the consent decree and ancillary instruments (including financial assurance documentation), and to advise on the credit facility and securities law implications of the settlement. TMC's prior counsel, Whitfield, Palmer & Goss LLP, represented TMC through the agreement-in-principle stage of the proceedings and continues to serve as regulatory counsel on certain RCRA and CERCLA compliance matters.

C. The Four Sites

The EPA/DOJ enforcement action encompasses the following four sites, each of which presents distinct environmental liability profiles:

1. Ridgecrest Copper-Molybdenum Mine. The Ridgecrest mine is located at 14200 Ridgecrest Mine Road, Drummond, Granite County, Montana 59832. The mine encompasses approximately 3,200 acres and operated as a large-scale open-pit copper and molybdenum mining operation from 1978 through December 2019, when TMC initiated closure and reclamation activities. The Ridgecrest site has been proposed for listing on the National Priorities List ("NPL") by the EPA, and is currently subject to an existing Administrative Order on Consent (Docket No. CERCLA-08-2022-0039) that requires ongoing removal actions and site characterization work. The Ridgecrest site represents the single largest component of TMC's environmental liability exposure, with a negotiated remediation obligation of $198.6 million (nominal) under the anticipated consent decree. The principal contaminants of concern at the site include acid mine drainage, heavy metals contamination of surface water and groundwater (copper, molybdenum, arsenic, selenium), and approximately 85 million tons of mine tailings requiring long-term stabilization and monitoring.

2. Gallatin Chemical Works. The Gallatin facility is located at 8800 Industrial Park Lane, Belgrade, Gallatin County, Montana 59714, and occupies approximately 145 acres. Unlike the Ridgecrest mine, the Gallatin facility remains an active specialty chemical manufacturing operation, producing flotation reagents, solvent extraction chemicals, and other process chemicals used in the mining industry. The facility operates under a RCRA Corrective Action permit (Permit No. MTD098712456) and is subject to ongoing corrective action requirements related to historical soil and groundwater contamination from chemical storage and handling operations. The negotiated remediation obligation for the Gallatin site is $42.8 million (nominal) over a fifteen-year implementation period.

3. Bonanza Creek Gold Mine. The Bonanza Creek mine is located at County Road 447, Mile Marker 12, in Lander County, Nevada 89820, and encompasses approximately 5,600 acres. The Bonanza Creek site is an active heap-leach gold mining operation that has been in production since 2005 and is expected to continue operations for approximately twelve additional years based on current reserve estimates. The enforcement action alleges CWA violations related to unauthorized discharges of process solution from the heap-leach facility and RCRA violations related to the management of spent carbon and other process wastes. The negotiated remediation obligation for the Bonanza Creek site is $63.2 million (nominal) over a twenty-year implementation period, including concurrent and post-closure corrective measures.

4. Kanawha Bend Chemical Plant. The Kanawha Bend facility is located at 2200 Chemical Valley Road, Institute, Kanawha County, West Virginia 25112, and occupies approximately 78 acres within the heavily industrialized Kanawha Valley corridor. The facility is an active chemical manufacturing plant producing sulfuric acid, phosphoric acid, and other industrial chemicals, and operates under a RCRA Corrective Action permit (Permit No. WVD048823915). The enforcement action includes a CERCLA Section 107 cost recovery claim relating to a June 14, 2020 sulfuric acid release that required an EPA emergency response action. The negotiated remediation obligation for the Kanawha Bend site is $38.9 million (nominal) over a twenty-year implementation period, with an additional $3.8 million in EPA past-cost reimbursement related to the 2020 emergency response.

III. Environmental Liability Covenant — Detailed Analysis

A. Covenant Language and Interpretation

The Environmental Liability Covenant is set forth in Section 7.12 of the Credit Agreement, within Article VII (Negative Covenants). In substance, the covenant provides that the Borrower shall not permit the aggregate amount of all disclosed and undisclosed Environmental Liabilities to exceed twenty-five percent (25%) of Consolidated Net Tangible Assets at any time. The covenant is tested at each quarterly compliance certificate delivery date and upon the occurrence of certain triggering events specified in the Credit Agreement, including the incurrence of material indebtedness, the entry into material agreements, and the occurrence of material litigation events.

The proper application of this covenant requires careful analysis of several key defined terms:

"Environmental Liabilities." The Credit Agreement defines "Environmental Liabilities" broadly to include, without limitation, all liabilities, obligations, responsibilities, remedial actions, losses, damages, punitive damages, consequential damages, treble damages, costs and expenses (including all reasonable fees, disbursements and expenses of counsel, expert and consulting fees, and costs of investigation and feasibility studies), fines, penalties, sanctions, and interest incurred as a result of any claim or demand, or any violation of, any Environmental Law. This definition is expansive and likely encompasses the full range of obligations that TMC will incur under the anticipated consent decree, including remediation obligations, civil penalties, cost recovery claims, supplemental environmental project commitments, and financial assurance costs. A significant interpretive question is whether the definition also captures contingent liabilities, such as stipulated penalties that may or may not be incurred depending on TMC's future compliance performance, and whether insurance-recoverable amounts are included in or excluded from the calculation. We address these questions below:

Stipulated Penalties. The consent decree will include a stipulated penalty provision imposing escalating daily penalties for failure to meet compliance milestones ($1,500/day for the first 30 days, $3,000/day for days 31 through 60, and $5,500/day thereafter, per violation). These penalties are contingent in nature — they will only be incurred if TMC fails to comply with the consent decree's requirements. Under ASC 450 (Contingencies), contingent liabilities are accrued only when the loss is both probable and reasonably estimable. At this juncture, we do not believe it is probable that TMC will incur material stipulated penalties, provided it dedicates adequate resources to compliance. Accordingly, we have excluded stipulated penalties from the aggregate environmental liability calculation for covenant compliance purposes. However, this assessment should be revisited quarterly as the consent decree implementation progresses.

Insurance Recoveries. The Credit Agreement does not expressly address whether insurance recoveries should be netted against Environmental Liabilities for covenant compliance purposes. The more conservative approach — and the one we recommend for purposes of this analysis — is to calculate Environmental Liabilities on a gross basis without giving effect to insurance recoveries that have not yet been received. As discussed in Section V below, TMC has potential insurance recoveries of approximately $45.0 to $55.0 million under its pollution legal liability policy with Meridian Environmental Insurance Company. If and when such recoveries are actually received, they would reduce aggregate Environmental Liabilities and increase covenant headroom. For present purposes, however, we have excluded these potential recoveries from the compliance calculation.

"Disclosed" vs. "Undisclosed." The covenant encompasses both "disclosed" and "undisclosed" Environmental Liabilities, which effectively means that the covenant captures the entirety of TMC's environmental exposure, regardless of whether it has been reported in TMC's financial statements or otherwise made known to the Lenders. All four sites implicated in the enforcement action are now "disclosed" in multiple respects: the EPA/DOJ complaint was filed as a public record on January 18, 2024; the sites and associated liabilities are discussed in TMC's periodic SEC filings (including the Q3 2024 10-Q); and prior counsel (Whitfield, Palmer & Goss LLP) provided notice of the enforcement action to Harborstone. We are not presently aware of any material "undisclosed" Environmental Liabilities beyond those addressed in this memorandum, although we note that TMC operates fourteen mines and six chemical processing facilities across North America, South America, and Australia, and it is possible that additional environmental liabilities could emerge at other facilities in the future. For covenant compliance purposes, we have included only the liabilities associated with the four consent decree sites and TMC's existing environmental remediation reserve (which captures estimated liabilities at all TMC facilities).

"Consolidated Net Tangible Assets" (CNTA). The Credit Agreement defines CNTA as total consolidated assets of the Borrower and its subsidiaries, minus (i) all intangible assets (including goodwill, patents, trademarks, copyrights, organizational expenses, and similar items), minus (ii) total consolidated liabilities of the Borrower and its subsidiaries (excluding, for purposes of this calculation, the Environmental Liabilities that are the subject of this covenant). Based on TMC's Q3 2024 10-Q, filed with the U.S. Securities and Exchange Commission on November 4, 2024, CNTA as of September 30, 2024 was approximately C$3.92 billion. This figure has been verified against the quarterly review workpapers prepared by TMC's independent accountants, Ridgeline Accounting Partners LLP (engagement partner: Frances Whitmore, CPA, CA).

Testing Frequency and Triggering Events. The Environmental Liability Covenant is tested on a quarterly basis through the delivery of a compliance certificate to the Agent, which is due within sixty (60) days after the end of each fiscal quarter and within ninety (90) days after the end of each fiscal year. In addition, the covenant is subject to interim testing upon the occurrence of certain triggering events, which include, among others, (i) the incurrence of material indebtedness (defined as indebtedness in excess of C$25.0 million), (ii) the entry into any material agreement (defined to include settlement agreements with governmental authorities in excess of C$50.0 million), and (iii) the occurrence of a material litigation event (defined to include the entry of any judgment, decree, or order in excess of C$25.0 million). The entry of the anticipated consent decree will almost certainly qualify as both a "material agreement" and a "material litigation event," thereby triggering an obligation to deliver an updated compliance certificate to Harborstone. This obligation is discussed further in Section VIII below.

B. Calculation of CNTA and Covenant Threshold

The covenant threshold is a function of CNTA, which is reported in Canadian dollars. The relevant figures are as follows:

These figures are derived from TMC's Q3 2024 10-Q filed with the SEC on November 4, 2024, and have been cross-referenced against the quarterly review workpapers prepared by Ridgeline Accounting Partners LLP under the supervision of engagement partner Frances Whitmore, CPA, CA. The CNTA calculation reflects total consolidated assets of approximately C$8.74 billion, minus intangible assets of approximately C$1.26 billion, minus total consolidated liabilities (excluding the environmental liabilities at issue) of approximately C$3.56 billion, yielding CNTA of approximately C$3.92 billion.

We note that the CNTA figure is subject to change on a quarterly basis as TMC's financial position evolves. Factors that could materially affect CNTA include commodity price fluctuations (particularly copper, molybdenum, and gold prices), asset impairments, changes in working capital, and the incurrence or repayment of indebtedness. The sensitivity of the covenant threshold to changes in CNTA is addressed in Section VI.A below.

C. Calculation of Aggregate Environmental Liabilities

We have calculated TMC's aggregate Environmental Liabilities based on the terms of the agreement in principle reached on July 30, 2024, supplemented by cost estimates prepared by TMC's environmental engineering consultants, EPA's independent technical reviewers, and the financial advisory team. The aggregate liabilities are composed of five principal categories: (1) remediation obligations, (2) civil penalties, (3) EPA past-costs reimbursement, (4) supplemental environmental project commitments, and (5) independent monitor costs. Each category is analyzed below in both nominal and net present value ("NPV") terms, with conversion to Canadian dollars at the current exchange rate.

1. Remediation Obligations

The remediation obligations represent the single largest component of TMC's aggregate Environmental Liabilities, totaling $343.5 million in nominal terms and approximately $245.1 million on an NPV basis (Discounted at 3.0%).

Ridgecrest Copper-Molybdenum Mine — $198.6 Million Nominal; $134.9 Million NPV. The Ridgecrest remediation obligation represents the outcome of extensive negotiations between TMC and the EPA regarding the appropriate scope, methodology, and cost of remediation at the site. TMC's initial cost estimate, prepared by Pinnacle Creek Environmental, LLC under the supervision of Dr. Astrid Bergmann, P.E., was $187.5 million. The EPA's independent cost estimate, prepared by Cascade Geosciences, Inc. under the supervision of Dr. Patricia Voss, was $224.0 million. The midpoint of these two estimates was $205.75 million. The negotiated figure of $198.6 million represents an outcome below the midpoint, reflecting TMC's successful advocacy for certain cost-saving remedial alternatives (including a revised tailings stabilization approach and a phased groundwater treatment system) while accepting the EPA's position on certain other elements (including the scope of surface water restoration in the Flint Creek watershed). The $198.6 million is to be expended over a thirty-year implementation period, which includes active remediation (years 1 through 15), performance monitoring (years 16 through 25), and long-term stewardship (years 26 through 30). The NPV of this obligation, discounted at a rate of 3.0% over 30 years (NPV factor of 0.6795), is approximately $134.9 million.

Gallatin Chemical Works — $42.8 Million Nominal; $34.1 Million NPV. The Gallatin remediation obligation covers the corrective action requirements under RCRA, including soil excavation and treatment, groundwater extraction and treatment, and cap-and-cover installation at specified solid waste management units. The implementation period is fifteen years, with active remediation anticipated in years 1 through 8 and performance monitoring in years 9 through 15. The NPV of this obligation, discounted at 3.0% over 15 years (NPV factor of 0.7969), is approximately $34.1 million.

Bonanza Creek Gold Mine — $63.2 Million Nominal; $47.1 Million NPV. The Bonanza Creek remediation obligation encompasses both concurrent corrective measures (to be implemented during the remaining operational life of the mine) and post-closure corrective measures (to be implemented following cessation of active mining). The principal remedial components include process solution containment improvements, heap-leach pad closure, cyanide detoxification, and long-term groundwater monitoring. The implementation period is twenty years, with the NPV calculated at 3.0% over 20 years (NPV factor of 0.7454) yielding approximately $47.1 million.

Kanawha Bend Chemical Plant — $38.9 Million Nominal; $29.0 Million NPV. The Kanawha Bend remediation obligation covers RCRA corrective action requirements, including the cleanup of contaminated soils and sediments, installation of a groundwater treatment system, and long-term monitoring of the Kanawha River adjacent to the facility. The implementation period is twenty years, with the NPV calculated at 3.0% over 20 years (NPV factor of 0.7454) yielding approximately $29.0 million.

2. Civil Penalties

The consent decree provides for aggregate civil penalties of $31.5 million, allocated among the four sites as follows:

The civil penalties are to be paid on a structured schedule as follows: twenty-five percent ($7,875,000) due within thirty (30) days of consent decree entry; a second installment of twenty-five percent ($7,875,000) due twelve (12) months after entry; a third installment of twenty-five percent ($7,875,000) due twenty-four (24) months after entry; and a final installment of twenty-five percent ($7,875,000) due thirty-six (36) months after entry. Despite the installment schedule, the entire $31.5 million is treated as a current or near-term liability for covenant compliance purposes, as the obligation is fixed, determinable, and unconditional. No NPV discounting has been applied given the relatively short payment horizon (36 months) and the certainty of the obligation.

3. EPA Past-Costs Reimbursement

The consent decree requires TMC to reimburse the EPA for past response costs totaling $18.1 million, allocated as follows:

These obligations arise under CERCLA Section 107 as cost recovery claims and are treated as lump-sum liabilities payable within ninety (90) days of consent decree entry. No NPV discounting has been applied.

4. Supplemental Environmental Projects

The consent decree requires TMC to fund three supplemental environmental projects totaling $12.0 million:

The SEP commitments are binding obligations under the consent decree and will be implemented over a three- to five-year period following decree entry. For covenant compliance purposes, the full $12.0 million is treated as a current obligation.

5. Independent Monitor Costs

The consent decree provides for the appointment of an independent environmental monitor to oversee TMC's compliance with the consent decree's remediation milestones and reporting requirements. The court has identified Verdant Analytics, Inc. (Dr. Kamal Osei, Senior Managing Director) as the proposed independent monitor. Based on the scope of the monitoring engagement and prevailing professional fee rates, independent monitor costs are estimated at approximately $960,000 per year over a five-year monitoring period, yielding a total estimated cost of $4.8 million.

These costs are estimates and may vary depending on the actual scope of monitoring activities required and any extensions of the monitoring period. For covenant compliance purposes, the full $4.8 million estimated cost is included in the aggregate Environmental Liabilities calculation.

6. Total Aggregate Environmental Liabilities

The following table summarizes TMC's aggregate Environmental Liabilities under the anticipated consent decree:

A critical interpretive question for covenant compliance purposes is whether the "Environmental Liabilities" tested under the covenant should be measured by reference to (a) the amounts booked as accrued reserves on TMC's balance sheet in accordance with applicable accounting standards, or (b) the estimated total nominal obligation, regardless of how those obligations are reflected in TMC's financial statements.

Booked Reserve Approach. TMC's environmental remediation reserve, as reported in the Q3 2024 10-Q, stands at C$340.0 million (approximately US$251.4 million at the current exchange rate of C$1.00 = US$0.7394). This reserve reflects management's estimate of the probable and reasonably estimable costs of environmental remediation across all TMC facilities, as determined in accordance with ASC 450 (Contingencies) and IAS 37 (Provisions, Contingent Liabilities and Contingent Assets). The booked reserve is below the nominal total obligation of US$409.9 million, resulting in a shortfall of approximately US$158.5 million. This shortfall may need to be addressed through reserve increases as the consent decree terms are finalized and the related obligations become more certain. However, if the covenant is tested against the booked reserve of C$340.0 million, TMC is well within the C$980.0 million threshold, with headroom of C$640.0 million.

Estimated Total Nominal Obligation Approach. Under the more conservative approach, the covenant is tested against the estimated total nominal obligation of US$409.9 million, converted to Canadian dollars at the current exchange rate. At C$1.00 = US$0.7394, US$409.9 million equals approximately C$554.4 million. Even under this approach, TMC is within the C$980.0 million threshold, with headroom of C$425.6 million.

Conclusion on Measurement. The Credit Agreement's definition of "Environmental Liabilities" likely references "accrued" or "recorded" environmental liabilities, which aligns more closely with the booked reserve approach. However, the Credit Agreement also captures "undisclosed" environmental liabilities, suggesting that the drafters intended the covenant to reach beyond merely booked amounts. To ensure the most conservative and defensible analysis, we recommend testing compliance against the estimated total nominal obligation of approximately C$554.4 million. As demonstrated below, TMC maintains compliance under either approach.

D. Covenant Compliance Determination

Based on the foregoing analysis, TMC's covenant compliance may be summarized as follows:

Most Conservative Interpretation (Total Nominal Obligation):

Booked Reserve Interpretation:

Conclusion: TMC is in compliance with the Environmental Liability Covenant under either interpretation. Under the most conservative approach — testing the total estimated nominal obligation of approximately C$554.4 million against the covenant threshold of C$980.0 million — TMC maintains C$425.6 million of headroom, representing utilization of only 56.6% of the available covenant capacity. This headroom provides a meaningful buffer against the risk factors analyzed in Section VI below.

IV. Financial Assurance Instruments and Covenant Implications

A. Description of Financial Assurance Package

The anticipated consent decree will require TMC to establish financial assurance demonstrating its ability to fund the remediation obligations at the four sites. The total financial assurance requirement is $245.0 million, to be satisfied through a combination of two instruments:

Surety Bond. TMC will be required to post a surety bond in the amount of $165.0 million issued by Ironbark Surety of America, Inc. (Bond No. ISA-ENV-2025-08934). The surety bond will guarantee TMC's performance of its remediation obligations under the consent decree. The annual premium for the surety bond is 1.85% of the face value, or $3,052,500 per year. The surety bond will be maintained for the duration of the consent decree's remediation requirements, subject to reduction as remediation milestones are completed and EPA approves corresponding reductions in the financial assurance amount.

Remediation Trust Fund. TMC will be required to establish a remediation trust fund with an initial deposit of $80.0 million, to be held and administered by Larchfield Trust Company, N.A. (Trust Agreement No. LTC-REM-2025-1177; trust officer: David Henshaw). The trust fund will be dedicated to funding remediation activities at the four sites, with disbursements subject to approval by the EPA and the independent monitor. The trust fund is structured as an irrevocable trust, with TMC as grantor and the EPA as beneficiary. The initial $80.0 million deposit may be supplemented with additional deposits if remediation costs exceed the trust fund balance.

The deadline for establishing the remediation trust fund and posting the surety bond is September 12, 2025, which is approximately 120 days after the target consent decree entry date of May 15, 2025.

B. Interaction with RCF Covenants

The financial assurance instruments raise several potential issues under the Credit Agreement's negative covenant provisions, which warrant careful analysis:

Surety Bond Indemnity Agreement. As a condition of issuing the surety bond, Ironbark Surety of America, Inc. will require TMC and its U.S. subsidiaries to execute a general agreement of indemnity (the "Indemnity Agreement") in favor of Ironbark. The Indemnity Agreement will impose upon TMC a contingent obligation to reimburse Ironbark for any losses, costs, or expenses incurred by Ironbark in the event the surety bond is called. This contingent obligation raises the question of whether it constitutes "Indebtedness" or a "Contingent Obligation" as those terms are defined in the Credit Agreement. If the Indemnity Agreement is deemed to create "Indebtedness" or a "Contingent Obligation" in excess of the Credit Agreement's applicable thresholds, it could potentially trigger a violation of the negative covenant restricting the incurrence of additional indebtedness. A detailed review of the Credit Agreement's definitions and basket provisions is required to determine whether the Indemnity Agreement falls within a permitted exception.

Remediation Trust Fund — Lien and Restricted Cash Issues. The $80.0 million remediation trust fund deposit raises two potential covenant concerns. First, the irrevocable nature of the trust may constitute a "Lien" or "encumbrance" on TMC's assets within the meaning of the Credit Agreement's negative pledge covenant. The deposit of $80.0 million into an irrevocable trust effectively removes those funds from TMC's general pool of assets, potentially creating a security interest in favor of the EPA as trust beneficiary. Second, the trust deposit may constitute "Restricted Cash" or a "Restricted Investment" that could affect the calculation of TMC's liquidity covenants, minimum cash requirements, or borrowing base under the Credit Agreement. If the $80.0 million is excluded from available liquidity, it could affect TMC's compliance with other financial covenants or its undrawn availability under the RCF.

Surety Bond Premium. The annual surety bond premium of $3,052,500 constitutes an operating expense that will flow through TMC's income statement. Relative to TMC's trailing twelve-month EBITDA of approximately C$1.14 billion (approximately US$843 million), the annual premium is de minimis, representing less than 0.4% of EBITDA. The premium expense is unlikely to have a material impact on TMC's financial covenant compliance.

C. Assessment

Based on our preliminary analysis, the financial assurance instruments should not, by themselves, trigger a covenant breach under the RCF. However, the surety bond Indemnity Agreement and the remediation trust fund deposit warrant careful review against the Credit Agreement's specific definitions of "Permitted Liens," "Permitted Indebtedness," "Contingent Obligations," and "Restricted Payments." We anticipate that the Indemnity Agreement may fall within the Credit Agreement's general basket for contingent obligations arising in the ordinary course of business, and the remediation trust fund may qualify as a "Permitted Lien" to the extent the Credit Agreement includes a carve-out for liens arising under court orders or governmental directives. However, this analysis is necessarily preliminary and will be refined once we have completed our detailed review of the Credit Agreement's defined terms and basket provisions.

We recommend that TMC proactively seek confirmation from Harborstone that the financial assurance instruments do not trigger any covenant violations. If Harborstone determines that the instruments fall outside the existing covenant baskets, TMC should be prepared to request a limited waiver or amendment to the Credit Agreement to accommodate the financial assurance package. Such a request should be framed as a routine accommodation in connection with a government-mandated consent decree, and we would expect Harborstone and the syndicate to be receptive to a narrowly tailored amendment, particularly given TMC's strong overall financial position and the significant headroom under the Environmental Liability Covenant.

V. Potential Insurance Recoveries and Their Effect on Covenant Compliance

A. Meridian Environmental Insurance Company — Pollution Legal Liability Coverage

TMC maintains a pollution legal liability ("PLL") insurance policy with Meridian Environmental Insurance Company (Policy No. MEI-ENV-2021-04738) for the policy period of July 1, 2021 through July 1, 2024. The policy provides per-occurrence coverage 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.

The current status of coverage under the Meridian policy is as follows:

Ridgecrest Copper-Molybdenum Mine: Meridian has denied coverage for the Ridgecrest site, invoking the policy's pollution exclusion for known or pre-existing conditions. Meridian contends that the contamination at Ridgecrest was known to TMC prior to the policy inception date and therefore falls outside the scope of coverage. TMC's insurance coverage counsel at Whitfield, Palmer & Goss LLP has challenged this denial and is evaluating the potential for litigation or arbitration.

Kanawha Bend Chemical Plant: Meridian has denied coverage for the Kanawha Bend site on the basis of late notice. Meridian contends that TMC failed to provide timely notice of the June 14, 2020 sulfuric acid release within the notice period required by the policy. TMC disputes this contention, asserting that notice was provided within a reasonable time under the circumstances. This issue remains unresolved.

Gallatin Chemical Works: Meridian has acknowledged coverage for the Gallatin site, subject to the $5.0 million SIR per occurrence. The extent of recoverable costs is under discussion between TMC and Meridian's claims adjuster, Sheila Grantham.

Bonanza Creek Gold Mine: Meridian has acknowledged coverage for the Bonanza Creek site, subject to the $5.0 million SIR per occurrence. As with Gallatin, the extent of recoverable costs is under negotiation.

Based on the current coverage status, the maximum theoretical recovery under the Meridian policy is the $75.0 million aggregate limit. However, given the coverage denials for Ridgecrest and Kanawha Bend, and the allocation disputes likely to arise for the covered sites, a realistic estimate of insurance recovery is more modest. Northspire Capital Markets, Inc. (Vivian Okafor, Managing Director) has estimated that TMC can reasonably expect to recover between $45.0 million and $55.0 million from Meridian after resolution of coverage disputes and allocation issues.

For covenant compliance purposes, we have adopted a conservative approach and have not credited any insurance recoveries in our aggregate Environmental Liabilities calculation. Insurance recoveries, if and when received, would reduce aggregate Environmental Liabilities, thereby increasing covenant headroom. However, it would be imprudent to rely on unrealized insurance recoveries for purposes of demonstrating covenant compliance, particularly given the unresolved coverage disputes with Meridian.

B. Effect on Headroom

If TMC ultimately receives insurance recoveries in the estimated range of $45.0 million to $55.0 million, the effect on covenant headroom would be as follows:

These figures illustrate that successful pursuit of insurance recoveries would materially enhance TMC's covenant headroom, increasing it from C$425.6 million to as much as approximately C$500.0 million. We recommend that TMC continue to vigorously pursue its insurance claims against Meridian, as discussed further in the recommendations section of this memorandum.

VI. Sensitivity Analysis and Risk Factors

While TMC is currently in compliance with the Environmental Liability Covenant and maintains significant headroom, several risk factors could erode this headroom over the remaining term of the RCF. We analyze the most material risks below.

A. CNTA Erosion Risk

The covenant threshold of C$980.0 million is derived from CNTA, which is itself a dynamic figure that fluctuates with TMC's financial performance and asset values. If CNTA declines — whether due to asset impairments, commodity price declines, increased borrowings, or other factors — the 25% threshold will decline proportionally.

To illustrate the sensitivity of the covenant to CNTA changes, we present the following table:

As this table demonstrates, CNTA would need to decline by approximately 43.4% — from C$3.92 billion to approximately C$2.22 billion — before the covenant threshold would be breached at the current level of Environmental Liabilities. A decline of this magnitude would represent an extraordinary deterioration in TMC's financial condition and is not anticipated under current market conditions. TMC's diversified operations across fourteen mines and six chemical processing facilities in North America, South America, and Australia, together with its fiscal year 2023 revenue of C$4.82 billion, provide reasonable assurance of asset base stability. Nevertheless, ongoing monitoring of CNTA trends is prudent, particularly in light of the cyclical nature of the mining industry and TMC's exposure to copper, molybdenum, and gold price fluctuations.

B. Environmental Liability Escalation Risk

The environmental liability figures used in this analysis are based on negotiated cost estimates and are, by their nature, subject to uncertainty. Several factors could cause actual environmental liabilities to exceed the current estimates:

Remediation Cost Escalation. The negotiated remediation figure for Ridgecrest ($198.6 million) represents a compromise between TMC's estimate of $187.5 million and EPA's estimate of $224.0 million. If actual site conditions prove more challenging than anticipated — for example, if additional contamination is discovered during remediation, if selected remedies fail to achieve performance standards, or if regulatory requirements are tightened — actual remediation costs could exceed the negotiated figure. Similarly, the remediation cost estimates for Gallatin, Bonanza Creek, and Kanawha Bend are subject to adjustment based on site conditions, technology performance, and regulatory changes. The consent decree is expected to include a reopener provision that would allow the EPA to seek additional remediation if previously unknown conditions are discovered, potentially increasing TMC's liability beyond the negotiated figures.

Additional Regulatory Actions. TMC operates fourteen mines and six chemical processing facilities across multiple jurisdictions. It is possible that additional environmental liabilities could arise at facilities not currently implicated in the EPA/DOJ enforcement action. Any such additional liabilities would increase TMC's aggregate Environmental Liabilities for covenant compliance purposes, reducing headroom.

Stipulated Penalties. The consent decree's stipulated penalty provisions impose escalating daily penalties for noncompliance: $1,500 per day for the first 30 days of a violation, $3,000 per day for days 31 through 60, and $5,500 per day thereafter, on a per-violation basis. While we do not currently anticipate that TMC will incur material stipulated penalties, a sustained period of noncompliance with remediation milestones — whether due to technical difficulties, contractor performance issues, or regulatory disputes — could result in the accumulation of significant penalty amounts. For example, a single violation persisting for one year could result in stipulated penalties of approximately $1.9 million; multiple concurrent violations could multiply this figure substantially.

Natural Resource Damages. The current consent decree framework does not include a comprehensive resolution of natural resource damages ("NRD") claims. The federal and state natural resource trustees may pursue NRD claims separately, which could result in additional liabilities not currently reflected in our analysis. This is a particular concern at the Ridgecrest site, where historic mining operations have caused significant impacts to the Flint Creek watershed and associated fisheries.

C. Exchange Rate Risk

TMC's Environmental Liabilities are denominated in U.S. dollars, while the covenant threshold is calculated based on CNTA, which is reported in Canadian dollars. Movements in the CAD/USD exchange rate directly affect the CAD-equivalent of TMC's Environmental Liabilities and, consequently, the available covenant headroom.

As this table illustrates, a weakening of the Canadian dollar against the U.S. dollar would increase the CAD-equivalent of TMC's Environmental Liabilities, thereby reducing covenant headroom. However, even at a significantly weaker exchange rate of C$1 = US$0.65 (representing an approximately 12% depreciation from the current rate), TMC would retain headroom of approximately C$349.4 million — well within the covenant threshold. Exchange rate risk is therefore a moderating factor but not a near-term threat to covenant compliance.

D. Impact of Consent Decree Entry on Covenant Triggering Events

The entry of the consent decree, which is targeted for May 15, 2025, will almost certainly constitute a "material agreement" and a "material litigation event" under the Credit Agreement's defined terms, thereby triggering an obligation to deliver an updated compliance certificate to Harborstone. The Credit Agreement requires delivery of a compliance certificate within fifteen (15) business days of the occurrence of a triggering event.

TMC should prepare a draft compliance certificate well in advance of the anticipated consent decree entry date, so that it can be finalized and delivered to Harborstone promptly upon decree entry. The compliance certificate should demonstrate TMC's continued compliance with the Environmental Liability Covenant and all other financial covenants under the Credit Agreement. We recommend that the compliance certificate be accompanied by a disclosure letter providing a comprehensive summary of the consent decree terms and TMC's financial obligations thereunder. The recommended disclosures are discussed in Section VIII below.

VII. Comparison with TMC's Environmental Remediation Reserve

TMC's environmental remediation reserve, as reported in the Q3 2024 10-Q, stands at C$340.0 million (approximately US$251.4 million at the current exchange rate). This reserve reflects management's best estimate, prepared in consultation with TMC's environmental engineers and independent accountants, of the probable and reasonably estimable costs of environmental remediation at all TMC facilities, calculated in accordance with ASC 450 (Contingencies) and IAS 37 (Provisions, Contingent Liabilities and Contingent Assets).

The reserve of US$251.4 million is approximately US$158.5 million less than the estimated total nominal obligation of US$409.9 million under the anticipated consent decree. This shortfall reflects several factors: (i) the reserve was established before the consent decree terms were finalized, and was based on earlier cost estimates that did not reflect the full negotiated remediation obligations; (ii) certain components of the total nominal obligation — such as civil penalties, SEP commitments, and monitor costs — may not have been fully accrued in the reserve; and (iii) the reserve may reflect NPV-based or probability-weighted estimates rather than nominal totals, consistent with applicable accounting standards.

This shortfall will need to be addressed through one or more of the following approaches:

(a) Reserve Increase. TMC may need to increase its environmental remediation reserve to more closely match the estimated total nominal obligation of approximately US$409.9 million (C$554.4 million). Any reserve increase would be recorded as a charge to earnings in the period in which the increase is recognized, which could have implications for TMC's financial statements, earnings guidance, and other financial covenants. The timing and magnitude of any reserve increase should be coordinated with Ridgeline Accounting Partners LLP (engagement partner: Frances Whitmore, CPA, CA) and Northspire Capital Markets, Inc. (Vivian Okafor, Managing Director), taking into account the applicable accounting standards and the stage of consent decree negotiations.

(b) Reclassification of Certain Obligations. Certain components of the total nominal obligation may properly be classified as contingent liabilities rather than accrued liabilities under ASC 450 / IAS 37, depending on the probability and estimability of the underlying obligation. For example, independent monitor costs are estimates that may vary significantly from actual costs, and certain remediation cost components are subject to adjustment based on future site conditions. To the extent that these obligations are classified as contingent rather than accrued, they would be disclosed in the notes to the financial statements but would not increase the booked reserve. The accounting analysis is the subject of a separate memorandum being prepared by C&H in consultation with Ridgeline, targeted for completion on December 18, 2024.

For covenant compliance purposes, as noted in Section III.C.6 above, the Credit Agreement's definition of "Environmental Liabilities" may capture either booked reserves or total estimated obligations, depending on the interpretation applied. The more conservative reading — testing against the total estimated nominal obligation of approximately C$554.4 million — still yields substantial headroom of C$425.6 million. Accordingly, while the reserve adequacy issue is important for financial reporting and accounting purposes, it does not affect our conclusion regarding covenant compliance.

VIII. Disclosure and Notification Obligations Under the RCF

A. Mandatory Disclosure Requirements

The Credit Agreement imposes several affirmative disclosure obligations on TMC with respect to environmental matters and material litigation events. These obligations are found primarily in Article VI (Affirmative Covenants), Sections 6.02 (Financial Statements and Other Information), 6.05 (Litigation and Environmental Notices), and 6.06 (Compliance Certificates).

Material Litigation Disclosure. Section 6.05(a) requires TMC to provide prompt written notice to the Agent of any litigation, investigation, or proceeding that (i) involves a claim or potential liability in excess of C$25.0 million, or (ii) is brought by or on behalf of any governmental authority. The filing of the DOJ complaint on January 18, 2024, clearly triggered this disclosure obligation. We understand that TMC's prior counsel, Whitfield, Palmer & Goss LLP, made timely written disclosure to Harborstone of the commencement of the enforcement action, and that subsequent status updates have been provided in connection with TMC's quarterly compliance certificate deliveries. C&H is in the process of confirming the completeness and timeliness of these prior disclosures by reviewing the relevant correspondence files maintained by Whitfield, Palmer & Goss LLP.

Environmental Liability Disclosure. Section 6.05(b) requires TMC to provide prompt written notice to the Agent of any material change in the Company's environmental liabilities or environmental reserves, including any increase in estimated environmental remediation costs in excess of C$50.0 million. The consent decree terms, which establish remediation obligations and other liabilities totaling approximately US$409.9 million (C$554.4 million), will constitute a material change in TMC's environmental liabilities and will require supplemental disclosure to Harborstone upon execution or lodging of the consent decree.

Compliance Certificate Requirements. Section 6.06 requires TMC to deliver a compliance certificate to the Agent on a quarterly basis (within sixty days after each fiscal quarter-end and ninety days after each fiscal year-end) and upon the occurrence of certain triggering events. As discussed in Section VI.D above, the entry of the consent decree will constitute a triggering event requiring the delivery of an updated compliance certificate.

B. Recommended Disclosures

We recommend that TMC prepare and deliver a comprehensive disclosure letter to Harborstone National Bank, N.A. summarizing the terms of the consent decree and confirming continued compliance with the Environmental Liability Covenant. The disclosure letter should address, at a minimum, the following items:

(i) a summary of the consent decree, including the parties, the sites covered, the regulatory violations resolved, and the duration of the decree;

(ii) a detailed breakdown of TMC's financial obligations under the consent decree, including:

• total nominal remediation obligations: $343.5 million (Ridgecrest: $198.6 million; Gallatin: $42.8 million; Bonanza Creek: $63.2 million; Kanawha Bend: $38.9 million);

• civil penalties: $31.5 million, with the installment payment schedule;

• EPA past-costs reimbursement: $18.1 million;

• supplemental environmental project commitments: $12.0 million;

• independent monitor costs (estimated): $4.8 million over five years;

• grand total: $409.9 million nominal;

(iii) a description of the financial assurance package, including the $165.0 million surety bond from Ironbark Surety of America, Inc. and the $80.0 million remediation trust fund to be established with Larchfield Trust Company, N.A., totaling $245.0 million;

(iv) a covenant compliance calculation demonstrating that TMC's aggregate Environmental Liabilities of approximately C$554.4 million remain well within the covenant threshold of C$980.0 million, with headroom of approximately C$425.6 million; and

(v) a representation that TMC is in compliance with all covenants under the Credit Agreement and is not aware of any Default or Event of Default.

Timing. We recommend that the disclosure letter be prepared and delivered to Harborstone promptly after the consent decree is substantially final and before it is lodged with the court for public notice and comment. Based on the current timeline of consent decree negotiations, we anticipate that the consent decree will be substantially final in late February or early March 2025. Accordingly, we recommend targeting early March 2025 for delivery of the disclosure letter. This timing will allow TMC to demonstrate transparency and proactivity in its dealings with Harborstone, while also providing the Agent with adequate time to review the disclosure before the consent decree is lodged and becomes a matter of public record.

Coordination with Compliance Certificate. Following entry of the consent decree (target: May 15, 2025), TMC will be required to deliver an updated compliance certificate to Harborstone within fifteen (15) business days. C&H will prepare a draft compliance certificate and disclosure letter for TMC's review, in coordination with Northspire Capital Markets, Inc. on messaging and presentation. We anticipate delivering the draft documents to TMC for review by February 15, 2025.

IX. Recommendations

Based on the foregoing analysis, we offer the following recommendations:

1. Immediate: No Covenant Breach Exists or Is Anticipated. No covenant breach exists or is anticipated under current projections. TMC maintains approximately C$425.6 million of headroom under the Environmental Liability Covenant, representing utilization of only 56.6% of the available covenant capacity, even under the most conservative calculation methodology. No immediate corrective action is required.

2. Proactive Disclosure to Harborstone. Prepare a comprehensive disclosure letter to Harborstone National Bank, N.A. summarizing the consent decree terms, the Company's financial obligations thereunder, and confirming continued covenant compliance. The disclosure letter should be delivered in early March 2025, prior to the lodging of the consent decree with the court. C&H will prepare the initial draft in coordination with Northspire Capital Markets, Inc. on messaging and tone. The disclosure should be framed affirmatively, emphasizing TMC's proactive approach to resolving its environmental liabilities and the Company's continued financial strength and covenant compliance.

3. Compliance Certificate Preparation. Prepare an updated covenant compliance certificate for delivery to Harborstone upon or shortly after entry of the consent decree (target: May/June 2025). The compliance certificate should include a detailed covenant compliance calculation demonstrating continued satisfaction of the Environmental Liability Covenant and all other financial covenants under the Credit Agreement. C&H will prepare the draft compliance certificate for TMC's review, in coordination with TMC's finance team and Ridgeline Accounting Partners LLP.

4. Financial Assurance Review. Conduct a detailed review of the Credit Agreement's definitions of "Permitted Liens," "Permitted Indebtedness," "Contingent Obligations," and "Restricted Payments" to confirm that the surety bond indemnity agreement and the remediation trust fund do not trigger separate covenant issues under the negative covenant provisions. If any of the financial assurance instruments fall outside the existing covenant baskets, consider whether a limited waiver or amendment to the Credit Agreement may be prudent to accommodate the financial assurance package. C&H will complete this review and provide a supplemental memorandum addressing these issues (anticipated delivery: March 5, 2025).

5. Ongoing Monitoring. Implement a quarterly monitoring protocol to track CNTA levels, exchange rate fluctuations, and environmental liability estimates, and to ensure continued compliance with the Environmental Liability Covenant through the RCF's March 15, 2027 maturity. This monitoring should be coordinated with Carolyn Bracebridge (CFO) for financial data inputs and Gareth Linford (VP, Environmental Health & Safety) for updated remediation cost estimates. C&H will prepare a quarterly covenant compliance tracking summary for TMC's internal use and will flag any developments that could materially affect the co

PRIVILEGED AND CONFIDENTIAL — ATTORNEY-CLIENT PRIVILEGE / ATTORNEY WORK PRODUCT This memorandum is a privileged and confidential communication prepared by Calderwood & Harkness LLP at the request of and for the benefit of Torchlight Mining Corp. It is protected from disclosure by the attorney-client privilege and the attorney work-product doctrine. This memorandum should not be disclosed to any third party without the prior written consent of Calderwood & Harkness LLP.
MEMORANDUM
TO: Miriam Soo-Hwan Park, General Counsel, Torchlight Mining Corp. Carolyn Bracebridge, Chief Financial Officer, Torchlight Mining Corp.
FROM: Harrison Wexford, Calderwood & Harkness LLP Beatrice Holloway, Calderwood & Harkness LLP Elliot Nguyen, Calderwood & Harkness LLP
DATE: November 18, 2024
RE: Analysis of Environmental Liability Covenant Compliance Under Syndicated Revolving Credit Facility (Agent: Harborstone National Bank, N.A.)
Matter No.: 1039-00003
I. Executive Summary
This memorandum analyzes whether the environmental liabilities arising from the pending EPA/DOJ enforcement action, United States et al. v. Torchlight Mining Corp. et al., Civil Action No. 9:24-cv-00087-DWM (D. Mont.), and the anticipated obligations under the consent decree currently being negotiated, will cause Torchlight Mining Corp. ("TMC" or the "Company") to breach the environmental liability covenant contained in its C$750.0 million syndicated revolving credit facility (the "RCF"). The RCF is administered by Harborstone National Bank, N.A. (the "Agent" or "Harborstone") and matures on March 15, 2027.
The key covenant at issue provides that TMC's aggregate disclosed and undisclosed environmental liabilities shall not exceed twenty-five percent (25%) of its consolidated net tangible assets ("CNTA"). Based on TMC's most recently filed Form 10-Q for the quarter ended September 30, 2024 (the "Q3 2024 10-Q"), the Company's CNTA stands at approximately C$3.92 billion, yielding a covenant threshold of C$980.0 million (approximately US$724.4 million at the current exchange rate of C$1.00 = US$0.7394).
We have conducted a comprehensive analysis of TMC's aggregate environmental liabilities across all four sites implicated in the EPA/DOJ enforcement action — the Ridgecrest Copper-Molybdenum Mine (Montana), Gallatin Chemical Works (Montana), Bonanza Creek Gold Mine (Nevada), and Kanawha Bend Chemical Plant (West Virginia). Our analysis encompasses remediation obligations, civil penalties, EPA past-costs reimbursement, supplemental environmental project ("SEP") commitments, and independent monitor costs. In the aggregate, these liabilities total approximately US$409.9 million on a nominal basis, equivalent to approximately C$554.4 million at the current exchange rate.
Measured against the covenant threshold of C$980.0 million, TMC maintains significant headroom of approximately C$425.6 million, even under the most conservative calculation methodology. The Company is currently in compliance with the environmental liability covenant, and we do not anticipate a breach under current projections.
However, several risk factors could erode this headroom over time, including potential CNTA erosion due to asset impairments or commodity price declines, escalation of remediation costs beyond negotiated estimates, unfavorable movements in the CAD/USD exchange rate, and the potential incurrence of stipulated penalties under the consent decree. Additionally, the financial assurance instruments required by the consent decree — a $165.0 million surety bond and an $80.0 million remediation trust fund — warrant careful analysis under the RCF's negative covenant provisions regarding permitted liens, permitted indebtedness, and restricted payments.
We recommend that TMC undertake proactive disclosure to Harborstone, prepare an updated compliance certificate for delivery upon or shortly after consent decree entry, and implement an ongoing quarterly monitoring protocol to ensure continued compliance through the RCF's maturity. These recommendations, together with additional steps regarding reserve adequacy, insurance recovery, and contingency planning, are set forth in detail in Section IX below.
II. Background
A. The Revolving Credit Facility
On March 15, 2022, TMC, as borrower, entered into a C$750.0 million Senior Secured Syndicated Revolving Credit Facility Agreement (the "Credit Agreement") with Harborstone National Bank, N.A., as administrative agent, and a syndicate of lenders comprising seven financial institutions (the "Lenders"). The Credit Agreement provides TMC with a revolving line of credit that may be drawn in Canadian dollars or United States dollars, subject to customary borrowing base limitations, financial covenants, and conditions precedent to each borrowing. The facility matures on March 15, 2027.
The Credit Agreement is guaranteed on a joint and several basis by the following wholly owned domestic subsidiaries of TMC (collectively, the "Guarantors"):
(a) Torchlight Mining (U.S.) Inc. (EIN: 83-2047156), a Delaware corporation and TMC's principal U.S. operating subsidiary;
(b) Torchlight Specialty Chemicals, Inc. (EIN: 47-3819204), a Delaware corporation that operates TMC's specialty chemical manufacturing business in the United States;
(c) Ridgecrest Mine Holdings, LLC (Montana Secretary of State ID: E1042738), a Montana limited liability company that holds the Ridgecrest Copper-Molybdenum Mine and related mineral rights; and
(d) Bonanza Creek Mining, LLC (Nevada Secretary of State Entity No.: E0518294731), a Nevada limited liability company that holds the Bonanza Creek Gold Mine and related mining claims.
The Credit Agreement contains a comprehensive set of affirmative and negative covenants customary for syndicated credit facilities of this nature, including financial covenants relating to leverage ratios, interest coverage, and minimum liquidity, as well as negative covenants restricting the incurrence of additional indebtedness, the creation of liens, the making of restricted payments, and the disposition of assets. Of particular relevance to this memorandum, Article VII (Negative Covenants) of the Credit Agreement contains a specific environmental liability covenant (the "Environmental Liability Covenant"), which is analyzed in detail in Section III below.
The Credit Agreement also imposes certain affirmative obligations with respect to environmental matters, including requirements to maintain compliance with applicable environmental laws in all material respects, to promptly notify the Agent of any material environmental claims or litigation, and to deliver periodic compliance certificates certifying the Company's continued satisfaction of all financial and environmental covenants. These disclosure and notification obligations are discussed in Section VIII below.
As of the date of this memorandum, TMC has approximately C$312.5 million drawn under the RCF, leaving approximately C$437.5 million of undrawn availability. The Company's ability to maintain this borrowing capacity through the RCF's maturity is dependent, among other things, on continued compliance with the Environmental Liability Covenant.
B. The EPA/DOJ Enforcement Action
On January 18, 2024, the United States, acting on behalf of the Environmental Protection Agency ("EPA") and through the Department of Justice ("DOJ"), together with the States of Montana, Nevada, and West Virginia (collectively, the "Plaintiffs"), filed a multi-count civil enforcement complaint against TMC and each of the Guarantors (collectively, the "Defendants") in the United States District Court for the District of Montana, Missoula Division. The case is captioned United States of America et al. v. Torchlight Mining Corp. et al., Civil Action No. 9:24-cv-00087-DWM, and is assigned to the Honorable Donald W. Molloy, Senior United States District Judge.
The complaint alleges violations of the Clean Water Act ("CWA") Section 301 (unauthorized discharges of pollutants into waters of the United States), the Resource Conservation and Recovery Act ("RCRA") Sections 3004 and 3005 (violations of hazardous waste management standards and permitting requirements), and the Comprehensive Environmental Response, Compensation, and Liability Act ("CERCLA") Section 107 (liability for response costs at contaminated sites). The allegations span operations at four separate facilities across three states, as described in Section II.C below.
Following extensive motion practice and an initial case management conference, the parties entered into mediation under the supervision of Magistrate Judge Jeremiah C. Lynch. On July 30, 2024, the parties reached an agreement in principle on the framework for a consent decree that would resolve all claims in the enforcement action. The principal terms of the agreement in principle include remediation obligations at all four sites, the payment of civil penalties, reimbursement of EPA past costs, commitments to fund supplemental environmental projects, and the appointment of an independent environmental monitor. The parties are currently engaged in the process of reducing the agreement in principle to a final consent decree, which is anticipated to be lodged with the court for public notice and comment in the first quarter of 2025, with a target entry date of May 15, 2025.
Calderwood & Harkness LLP ("C&H") was engaged by TMC on October 21, 2024, to assist in the finalization of consent decree negotiations, to prepare and review the consent decree and ancillary instruments (including financial assurance documentation), and to advise on the credit facility and securities law implications of the settlement. TMC's prior counsel, Whitfield, Palmer & Goss LLP, represented TMC through the agreement-in-principle stage of the proceedings and continues to serve as regulatory counsel on certain RCRA and CERCLA compliance matters.
C. The Four Sites
The EPA/DOJ enforcement action encompasses the following four sites, each of which presents distinct environmental liability profiles:
1. Ridgecrest Copper-Molybdenum Mine. The Ridgecrest mine is located at 14200 Ridgecrest Mine Road, Drummond, Granite County, Montana 59832. The mine encompasses approximately 3,200 acres and operated as a large-scale open-pit copper and molybdenum mining operation from 1978 through December 2019, when TMC initiated closure and reclamation activities. The Ridgecrest site has been proposed for listing on the National Priorities List ("NPL") by the EPA, and is currently subject to an existing Administrative Order on Consent (Docket No. CERCLA-08-2022-0039) that requires ongoing removal actions and site characterization work. The Ridgecrest site represents the single largest component of TMC's environmental liability exposure, with a negotiated remediation obligation of $198.6 million (nominal) under the anticipated consent decree. The principal contaminants of concern at the site include acid mine drainage, heavy metals contamination of surface water and groundwater (copper, molybdenum, arsenic, selenium), and approximately 85 million tons of mine tailings requiring long-term stabilization and monitoring.
2. Gallatin Chemical Works. The Gallatin facility is located at 8800 Industrial Park Lane, Belgrade, Gallatin County, Montana 59714, and occupies approximately 145 acres. Unlike the Ridgecrest mine, the Gallatin facility remains an active specialty chemical manufacturing operation, producing flotation reagents, solvent extraction chemicals, and other process chemicals used in the mining industry. The facility operates under a RCRA Corrective Action permit (Permit No. MTD098712456) and is subject to ongoing corrective action requirements related to historical soil and groundwater contamination from chemical storage and handling operations. The negotiated remediation obligation for the Gallatin site is $42.8 million (nominal) over a fifteen-year implementation period.
3. Bonanza Creek Gold Mine. The Bonanza Creek mine is located at County Road 447, Mile Marker 12, in Lander County, Nevada 89820, and encompasses approximately 5,600 acres. The Bonanza Creek site is an active heap-leach gold mining operation that has been in production since 2005 and is expected to continue operations for approximately twelve additional years based on current reserve estimates. The enforcement action alleges CWA violations related to unauthorized discharges of process solution from the heap-leach facility and RCRA violations related to the management of spent carbon and other process wastes. The negotiated remediation obligation for the Bonanza Creek site is $63.2 million (nominal) over a twenty-year implementation period, including concurrent and post-closure corrective measures.
4. Kanawha Bend Chemical Plant. The Kanawha Bend facility is located at 2200 Chemical Valley Road, Institute, Kanawha County, West Virginia 25112, and occupies approximately 78 acres within the heavily industrialized Kanawha Valley corridor. The facility is an active chemical manufacturing plant producing sulfuric acid, phosphoric acid, and other industrial chemicals, and operates under a RCRA Corrective Action permit (Permit No. WVD048823915). The enforcement action includes a CERCLA Section 107 cost recovery claim relating to a June 14, 2020 sulfuric acid release that required an EPA emergency response action. The negotiated remediation obligation for the Kanawha Bend site is $38.9 million (nominal) over a twenty-year implementation period, with an additional $3.8 million in EPA past-cost reimbursement related to the 2020 emergency response.
III. Environmental Liability Covenant — Detailed Analysis
A. Covenant Language and Interpretation
The Environmental Liability Covenant is set forth in Section 7.12 of the Credit Agreement, within Article VII (Negative Covenants). In substance, the covenant provides that the Borrower shall not permit the aggregate amount of all disclosed and undisclosed Environmental Liabilities to exceed twenty-five percent (25%) of Consolidated Net Tangible Assets at any time. The covenant is tested at each quarterly compliance certificate delivery date and upon the occurrence of certain triggering events specified in the Credit Agreement, including the incurrence of material indebtedness, the entry into material agreements, and the occurrence of material litigation events.
The proper application of this covenant requires careful analysis of several key defined terms:
"Environmental Liabilities." The Credit Agreement defines "Environmental Liabilities" broadly to include, without limitation, all liabilities, obligations, responsibilities, remedial actions, losses, damages, punitive damages, consequential damages, treble damages, costs and expenses (including all reasonable fees, disbursements and expenses of counsel, expert and consulting fees, and costs of investigation and feasibility studies), fines, penalties, sanctions, and interest incurred as a result of any claim or demand, or any violation of, any Environmental Law. This definition is expansive and likely encompasses the full range of obligations that TMC will incur under the anticipated consent decree, including remediation obligations, civil penalties, cost recovery claims, supplemental environmental project commitments, and financial assurance costs. A significant interpretive question is whether the definition also captures contingent liabilities, such as stipulated penalties that may or may not be incurred depending on TMC's future compliance performance, and whether insurance-recoverable amounts are included in or excluded from the calculation. We address these questions below:
Stipulated Penalties. The consent decree will include a stipulated penalty provision imposing escalating daily penalties for failure to meet compliance milestones ($1,500/day for the first 30 days, $3,000/day for days 31 through 60, and $5,500/day thereafter, per violation). These penalties are contingent in nature — they will only be incurred if TMC fails to comply with the consent decree's requirements. Under ASC 450 (Contingencies), contingent liabilities are accrued only when the loss is both probable and reasonably estimable. At this juncture, we do not believe it is probable that TMC will incur material stipulated penalties, provided it dedicates adequate resources to compliance. Accordingly, we have excluded stipulated penalties from the aggregate environmental liability calculation for covenant compliance purposes. However, this assessment should be revisited quarterly as the consent decree implementation progresses.
Insurance Recoveries. The Credit Agreement does not expressly address whether insurance recoveries should be netted against Environmental Liabilities for covenant compliance purposes. The more conservative approach — and the one we recommend for purposes of this analysis — is to calculate Environmental Liabilities on a gross basis without giving effect to insurance recoveries that have not yet been received. As discussed in Section V below, TMC has potential insurance recoveries of approximately $45.0 to $55.0 million under its pollution legal liability policy with Meridian Environmental Insurance Company. If and when such recoveries are actually received, they would reduce aggregate Environmental Liabilities and increase covenant headroom. For present purposes, however, we have excluded these potential recoveries from the compliance calculation.
"Disclosed" vs. "Undisclosed." The covenant encompasses both "disclosed" and "undisclosed" Environmental Liabilities, which effectively means that the covenant captures the entirety of TMC's environmental exposure, regardless of whether it has been reported in TMC's financial statements or otherwise made known to the Lenders. All four sites implicated in the enforcement action are now "disclosed" in multiple respects: the EPA/DOJ complaint was filed as a public record on January 18, 2024; the sites and associated liabilities are discussed in TMC's periodic SEC filings (including the Q3 2024 10-Q); and prior counsel (Whitfield, Palmer & Goss LLP) provided notice of the enforcement action to Harborstone. We are not presently aware of any material "undisclosed" Environmental Liabilities beyond those addressed in this memorandum, although we note that TMC operates fourteen mines and six chemical processing facilities across North America, South America, and Australia, and it is possible that additional environmental liabilities could emerge at other facilities in the future. For covenant compliance purposes, we have included only the liabilities associated with the four consent decree sites and TMC's existing environmental remediation reserve (which captures estimated liabilities at all TMC facilities).
"Consolidated Net Tangible Assets" (CNTA). The Credit Agreement defines CNTA as total consolidated assets of the Borrower and its subsidiaries, minus (i) all intangible assets (including goodwill, patents, trademarks, copyrights, organizational expenses, and similar items), minus (ii) total consolidated liabilities of the Borrower and its subsidiaries (excluding, for purposes of this calculation, the Environmental Liabilities that are the subject of this covenant). Based on TMC's Q3 2024 10-Q, filed with the U.S. Securities and Exchange Commission on November 4, 2024, CNTA as of September 30, 2024 was approximately C$3.92 billion. This figure has been verified against the quarterly review workpapers prepared by TMC's independent accountants, Ridgeline Accounting Partners LLP (engagement partner: Frances Whitmore, CPA, CA).
Testing Frequency and Triggering Events. The Environmental Liability Covenant is tested on a quarterly basis through the delivery of a compliance certificate to the Agent, which is due within sixty (60) days after the end of each fiscal quarter and within ninety (90) days after the end of each fiscal year. In addition, the covenant is subject to interim testing upon the occurrence of certain triggering events, which include, among others, (i) the incurrence of material indebtedness (defined as indebtedness in excess of C$25.0 million), (ii) the entry into any material agreement (defined to include settlement agreements with governmental authorities in excess of C$50.0 million), and (iii) the occurrence of a material litigation event (defined to include the entry of any judgment, decree, or order in excess of C$25.0 million). The entry of the anticipated consent decree will almost certainly qualify as both a "material agreement" and a "material litigation event," thereby triggering an obligation to deliver an updated compliance certificate to Harborstone. This obligation is discussed further in Section VIII below.
B. Calculation of CNTA and Covenant Threshold
The covenant threshold is a function of CNTA, which is reported in Canadian dollars. The relevant figures are as follows:
These figures are derived from TMC's Q3 2024 10-Q filed with the SEC on November 4, 2024, and have been cross-referenced against the quarterly review workpapers prepared by Ridgeline Accounting Partners LLP under the supervision of engagement partner Frances Whitmore, CPA, CA. The CNTA calculation reflects total consolidated assets of approximately C$8.74 billion, minus intangible assets of approximately C$1.26 billion, minus total consolidated liabilities (excluding the environmental liabilities at issue) of approximately C$3.56 billion, yielding CNTA of approximately C$3.92 billion.
We note that the CNTA figure is subject to change on a quarterly basis as TMC's financial position evolves. Factors that could materially affect CNTA include commodity price fluctuations (particularly copper, molybdenum, and gold prices), asset impairments, changes in working capital, and the incurrence or repayment of indebtedness. The sensitivity of the covenant threshold to changes in CNTA is addressed in Section VI.A below.
C. Calculation of Aggregate Environmental Liabilities
We have calculated TMC's aggregate Environmental Liabilities based on the terms of the agreement in principle reached on July 30, 2024, supplemented by cost estimates prepared by TMC's environmental engineering consultants, EPA's independent technical reviewers, and the financial advisory team. The aggregate liabilities are composed of five principal categories: (1) remediation obligations, (2) civil penalties, (3) EPA past-costs reimbursement, (4) supplemental environmental project commitments, and (5) independent monitor costs. Each category is analyzed below in both nominal and net present value ("NPV") terms, with conversion to Canadian dollars at the current exchange rate.
1. Remediation Obligations
The remediation obligations represent the single largest component of TMC's aggregate Environmental Liabilities, totaling $343.5 million in nominal terms and approximately $245.1 million on an NPV basis (Discounted at 3.0%).
Ridgecrest Copper-Molybdenum Mine — $198.6 Million Nominal; $134.9 Million NPV. The Ridgecrest remediation obligation represents the outcome of extensive negotiations between TMC and the EPA regarding the appropriate scope, methodology, and cost of remediation at the site. TMC's initial cost estimate, prepared by Pinnacle Creek Environmental, LLC under the supervision of Dr. Astrid Bergmann, P.E., was $187.5 million. The EPA's independent cost estimate, prepared by Cascade Geosciences, Inc. under the supervision of Dr. Patricia Voss, was $224.0 million. The midpoint of these two estimates was $205.75 million. The negotiated figure of $198.6 million represents an outcome below the midpoint, reflecting TMC's successful advocacy for certain cost-saving remedial alternatives (including a revised tailings stabilization approach and a phased groundwater treatment system) while accepting the EPA's position on certain other elements (including the scope of surface water restoration in the Flint Creek watershed). The $198.6 million is to be expended over a thirty-year implementation period, which includes active remediation (years 1 through 15), performance monitoring (years 16 through 25), and long-term stewardship (years 26 through 30). The NPV of this obligation, discounted at a rate of 3.0% over 30 years (NPV factor of 0.6795), is approximately $134.9 million.
Gallatin Chemical Works — $42.8 Million Nominal; $34.1 Million NPV. The Gallatin remediation obligation covers the corrective action requirements under RCRA, including soil excavation and treatment, groundwater extraction and treatment, and cap-and-cover installation at specified solid waste management units. The implementation period is fifteen years, with active remediation anticipated in years 1 through 8 and performance monitoring in years 9 through 15. The NPV of this obligation, discounted at 3.0% over 15 years (NPV factor of 0.7969), is approximately $34.1 million.
Bonanza Creek Gold Mine — $63.2 Million Nominal; $47.1 Million NPV. The Bonanza Creek remediation obligation encompasses both concurrent corrective measures (to be implemented during the remaining operational life of the mine) and post-closure corrective measures (to be implemented following cessation of active mining). The principal remedial components include process solution containment improvements, heap-leach pad closure, cyanide detoxification, and long-term groundwater monitoring. The implementation period is twenty years, with the NPV calculated at 3.0% over 20 years (NPV factor of 0.7454) yielding approximately $47.1 million.
Kanawha Bend Chemical Plant — $38.9 Million Nominal; $29.0 Million NPV. The Kanawha Bend remediation obligation covers RCRA corrective action requirements, including the cleanup of contaminated soils and sediments, installation of a groundwater treatment system, and long-term monitoring of the Kanawha River adjacent to the facility. The implementation period is twenty years, with the NPV calculated at 3.0% over 20 years (NPV factor of 0.7454) yielding approximately $29.0 million.
2. Civil Penalties
The consent decree provides for aggregate civil penalties of $31.5 million, allocated among the four sites as follows:
The civil penalties are to be paid on a structured schedule as follows: twenty-five percent ($7,875,000) due within thirty (30) days of consent decree entry; a second installment of twenty-five percent ($7,875,000) due twelve (12) months after entry; a third installment of twenty-five percent ($7,875,000) due twenty-four (24) months after entry; and a final installment of twenty-five percent ($7,875,000) due thirty-six (36) months after entry. Despite the installment schedule, the entire $31.5 million is treated as a current or near-term liability for covenant compliance purposes, as the obligation is fixed, determinable, and unconditional. No NPV discounting has been applied given the relatively short payment horizon (36 months) and the certainty of the obligation.
3. EPA Past-Costs Reimbursement
The consent decree requires TMC to reimburse the EPA for past response costs totaling $18.1 million, allocated as follows:
These obligations arise under CERCLA Section 107 as cost recovery claims and are treated as lump-sum liabilities payable within ninety (90) days of consent decree entry. No NPV discounting has been applied.
4. Supplemental Environmental Projects
The consent decree requires TMC to fund three supplemental environmental projects totaling $12.0 million:
The SEP commitments are binding obligations under the consent decree and will be implemented over a three- to five-year period following decree entry. For covenant compliance purposes, the full $12.0 million is treated as a current obligation.
5. Independent Monitor Costs
The consent decree provides for the appointment of an independent environmental monitor to oversee TMC's compliance with the consent decree's remediation milestones and reporting requirements. The court has identified Verdant Analytics, Inc. (Dr. Kamal Osei, Senior Managing Director) as the proposed independent monitor. Based on the scope of the monitoring engagement and prevailing professional fee rates, independent monitor costs are estimated at approximately $960,000 per year over a five-year monitoring period, yielding a total estimated cost of $4.8 million.
These costs are estimates and may vary depending on the actual scope of monitoring activities required and any extensions of the monitoring period. For covenant compliance purposes, the full $4.8 million estimated cost is included in the aggregate Environmental Liabilities calculation.
6. Total Aggregate Environmental Liabilities
The following table summarizes TMC's aggregate Environmental Liabilities under the anticipated consent decree:
A critical interpretive question for covenant compliance purposes is whether the "Environmental Liabilities" tested under the covenant should be measured by reference to (a) the amounts booked as accrued reserves on TMC's balance sheet in accordance with applicable accounting standards, or (b) the estimated total nominal obligation, regardless of how those obligations are reflected in TMC's financial statements.
Booked Reserve Approach. TMC's environmental remediation reserve, as reported in the Q3 2024 10-Q, stands at C$340.0 million (approximately US$251.4 million at the current exchange rate of C$1.00 = US$0.7394). This reserve reflects management's estimate of the probable and reasonably estimable costs of environmental remediation across all TMC facilities, as determined in accordance with ASC 450 (Contingencies) and IAS 37 (Provisions, Contingent Liabilities and Contingent Assets). The booked reserve is below the nominal total obligation of US$409.9 million, resulting in a shortfall of approximately US$158.5 million. This shortfall may need to be addressed through reserve increases as the consent decree terms are finalized and the related obligations become more certain. However, if the covenant is tested against the booked reserve of C$340.0 million, TMC is well within the C$980.0 million threshold, with headroom of C$640.0 million.
Estimated Total Nominal Obligation Approach. Under the more conservative approach, the covenant is tested against the estimated total nominal obligation of US$409.9 million, converted to Canadian dollars at the current exchange rate. At C$1.00 = US$0.7394, US$409.9 million equals approximately C$554.4 million. Even under this approach, TMC is within the C$980.0 million threshold, with headroom of C$425.6 million.
Conclusion on Measurement. The Credit Agreement's definition of "Environmental Liabilities" likely references "accrued" or "recorded" environmental liabilities, which aligns more closely with the booked reserve approach. However, the Credit Agreement also captures "undisclosed" environmental liabilities, suggesting that the drafters intended the covenant to reach beyond merely booked amounts. To ensure the most conservative and defensible analysis, we recommend testing compliance against the estimated total nominal obligation of approximately C$554.4 million. As demonstrated below, TMC maintains compliance under either approach.
D. Covenant Compliance Determination
Based on the foregoing analysis, TMC's covenant compliance may be summarized as follows:
Most Conservative Interpretation (Total Nominal Obligation):
Booked Reserve Interpretation:
Conclusion: TMC is in compliance with the Environmental Liability Covenant under either interpretation. Under the most conservative approach — testing the total estimated nominal obligation of approximately C$554.4 million against the covenant threshold of C$980.0 million — TMC maintains C$425.6 million of headroom, representing utilization of only 56.6% of the available covenant capacity. This headroom provides a meaningful buffer against the risk factors analyzed in Section VI below.
IV. Financial Assurance Instruments and Covenant Implications
A. Description of Financial Assurance Package
The anticipated consent decree will require TMC to establish financial assurance demonstrating its ability to fund the remediation obligations at the four sites. The total financial assurance requirement is $245.0 million, to be satisfied through a combination of two instruments:
Surety Bond. TMC will be required to post a surety bond in the amount of $165.0 million issued by Ironbark Surety of America, Inc. (Bond No. ISA-ENV-2025-08934). The surety bond will guarantee TMC's performance of its remediation obligations under the consent decree. The annual premium for the surety bond is 1.85% of the face value, or $3,052,500 per year. The surety bond will be maintained for the duration of the consent decree's remediation requirements, subject to reduction as remediation milestones are completed and EPA approves corresponding reductions in the financial assurance amount.
Remediation Trust Fund. TMC will be required to establish a remediation trust fund with an initial deposit of $80.0 million, to be held and administered by Larchfield Trust Company, N.A. (Trust Agreement No. LTC-REM-2025-1177; trust officer: David Henshaw). The trust fund will be dedicated to funding remediation activities at the four sites, with disbursements subject to approval by the EPA and the independent monitor. The trust fund is structured as an irrevocable trust, with TMC as grantor and the EPA as beneficiary. The initial $80.0 million deposit may be supplemented with additional deposits if remediation costs exceed the trust fund balance.
The deadline for establishing the remediation trust fund and posting the surety bond is September 12, 2025, which is approximately 120 days after the target consent decree entry date of May 15, 2025.
B. Interaction with RCF Covenants
The financial assurance instruments raise several potential issues under the Credit Agreement's negative covenant provisions, which warrant careful analysis:
Surety Bond Indemnity Agreement. As a condition of issuing the surety bond, Ironbark Surety of America, Inc. will require TMC and its U.S. subsidiaries to execute a general agreement of indemnity (the "Indemnity Agreement") in favor of Ironbark. The Indemnity Agreement will impose upon TMC a contingent obligation to reimburse Ironbark for any losses, costs, or expenses incurred by Ironbark in the event the surety bond is called. This contingent obligation raises the question of whether it constitutes "Indebtedness" or a "Contingent Obligation" as those terms are defined in the Credit Agreement. If the Indemnity Agreement is deemed to create "Indebtedness" or a "Contingent Obligation" in excess of the Credit Agreement's applicable thresholds, it could potentially trigger a violation of the negative covenant restricting the incurrence of additional indebtedness. A detailed review of the Credit Agreement's definitions and basket provisions is required to determine whether the Indemnity Agreement falls within a permitted exception.
Remediation Trust Fund — Lien and Restricted Cash Issues. The $80.0 million remediation trust fund deposit raises two potential covenant concerns. First, the irrevocable nature of the trust may constitute a "Lien" or "encumbrance" on TMC's assets within the meaning of the Credit Agreement's negative pledge covenant. The deposit of $80.0 million into an irrevocable trust effectively removes those funds from TMC's general pool of assets, potentially creating a security interest in favor of the EPA as trust beneficiary. Second, the trust deposit may constitute "Restricted Cash" or a "Restricted Investment" that could affect the calculation of TMC's liquidity covenants, minimum cash requirements, or borrowing base under the Credit Agreement. If the $80.0 million is excluded from available liquidity, it could affect TMC's compliance with other financial covenants or its undrawn availability under the RCF.
Surety Bond Premium. The annual surety bond premium of $3,052,500 constitutes an operating expense that will flow through TMC's income statement. Relative to TMC's trailing twelve-month EBITDA of approximately C$1.14 billion (approximately US$843 million), the annual premium is de minimis, representing less than 0.4% of EBITDA. The premium expense is unlikely to have a material impact on TMC's financial covenant compliance.
C. Assessment
Based on our preliminary analysis, the financial assurance instruments should not, by themselves, trigger a covenant breach under the RCF. However, the surety bond Indemnity Agreement and the remediation trust fund deposit warrant careful review against the Credit Agreement's specific definitions of "Permitted Liens," "Permitted Indebtedness," "Contingent Obligations," and "Restricted Payments." We anticipate that the Indemnity Agreement may fall within the Credit Agreement's general basket for contingent obligations arising in the ordinary course of business, and the remediation trust fund may qualify as a "Permitted Lien" to the extent the Credit Agreement includes a carve-out for liens arising under court orders or governmental directives. However, this analysis is necessarily preliminary and will be refined once we have completed our detailed review of the Credit Agreement's defined terms and basket provisions.
We recommend that TMC proactively seek confirmation from Harborstone that the financial assurance instruments do not trigger any covenant violations. If Harborstone determines that the instruments fall outside the existing covenant baskets, TMC should be prepared to request a limited waiver or amendment to the Credit Agreement to accommodate the financial assurance package. Such a request should be framed as a routine accommodation in connection with a government-mandated consent decree, and we would expect Harborstone and the syndicate to be receptive to a narrowly tailored amendment, particularly given TMC's strong overall financial position and the significant headroom under the Environmental Liability Covenant.
V. Potential Insurance Recoveries and Their Effect on Covenant Compliance
A. Meridian Environmental Insurance Company — Pollution Legal Liability Coverage
TMC maintains a pollution legal liability ("PLL") insurance policy with Meridian Environmental Insurance Company (Policy No. MEI-ENV-2021-04738) for the policy period of July 1, 2021 through July 1, 2024. The policy provides per-occurrence coverage 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.
The current status of coverage under the Meridian policy is as follows:
Ridgecrest Copper-Molybdenum Mine: Meridian has denied coverage for the Ridgecrest site, invoking the policy's pollution exclusion for known or pre-existing conditions. Meridian contends that the contamination at Ridgecrest was known to TMC prior to the policy inception date and therefore falls outside the scope of coverage. TMC's insurance coverage counsel at Whitfield, Palmer & Goss LLP has challenged this denial and is evaluating the potential for litigation or arbitration.
Kanawha Bend Chemical Plant: Meridian has denied coverage for the Kanawha Bend site on the basis of late notice. Meridian contends that TMC failed to provide timely notice of the June 14, 2020 sulfuric acid release within the notice period required by the policy. TMC disputes this contention, asserting that notice was provided within a reasonable time under the circumstances. This issue remains unresolved.
Gallatin Chemical Works: Meridian has acknowledged coverage for the Gallatin site, subject to the $5.0 million SIR per occurrence. The extent of recoverable costs is under discussion between TMC and Meridian's claims adjuster, Sheila Grantham.
Bonanza Creek Gold Mine: Meridian has acknowledged coverage for the Bonanza Creek site, subject to the $5.0 million SIR per occurrence. As with Gallatin, the extent of recoverable costs is under negotiation.
Based on the current coverage status, the maximum theoretical recovery under the Meridian policy is the $75.0 million aggregate limit. However, given the coverage denials for Ridgecrest and Kanawha Bend, and the allocation disputes likely to arise for the covered sites, a realistic estimate of insurance recovery is more modest. Northspire Capital Markets, Inc. (Vivian Okafor, Managing Director) has estimated that TMC can reasonably expect to recover between $45.0 million and $55.0 million from Meridian after resolution of coverage disputes and allocation issues.
For covenant compliance purposes, we have adopted a conservative approach and have not credited any insurance recoveries in our aggregate Environmental Liabilities calculation. Insurance recoveries, if and when received, would reduce aggregate Environmental Liabilities, thereby increasing covenant headroom. However, it would be imprudent to rely on unrealized insurance recoveries for purposes of demonstrating covenant compliance, particularly given the unresolved coverage disputes with Meridian.
B. Effect on Headroom
If TMC ultimately receives insurance recoveries in the estimated range of $45.0 million to $55.0 million, the effect on covenant headroom would be as follows:
These figures illustrate that successful pursuit of insurance recoveries would materially enhance TMC's covenant headroom, increasing it from C$425.6 million to as much as approximately C$500.0 million. We recommend that TMC continue to vigorously pursue its insurance claims against Meridian, as discussed further in the recommendations section of this memorandum.
VI. Sensitivity Analysis and Risk Factors
While TMC is currently in compliance with the Environmental Liability Covenant and maintains significant headroom, several risk factors could erode this headroom over the remaining term of the RCF. We analyze the most material risks below.
A. CNTA Erosion Risk
The covenant threshold of C$980.0 million is derived from CNTA, which is itself a dynamic figure that fluctuates with TMC's financial performance and asset values. If CNTA declines — whether due to asset impairments, commodity price declines, increased borrowings, or other factors — the 25% threshold will decline proportionally.
To illustrate the sensitivity of the covenant to CNTA changes, we present the following table:
As this table demonstrates, CNTA would need to decline by approximately 43.4% — from C$3.92 billion to approximately C$2.22 billion — before the covenant threshold would be breached at the current level of Environmental Liabilities. A decline of this magnitude would represent an extraordinary deterioration in TMC's financial condition and is not anticipated under current market conditions. TMC's diversified operations across fourteen mines and six chemical processing facilities in North America, South America, and Australia, together with its fiscal year 2023 revenue of C$4.82 billion, provide reasonable assurance of asset base stability. Nevertheless, ongoing monitoring of CNTA trends is prudent, particularly in light of the cyclical nature of the mining industry and TMC's exposure to copper, molybdenum, and gold price fluctuations.
B. Environmental Liability Escalation Risk
The environmental liability figures used in this analysis are based on negotiated cost estimates and are, by their nature, subject to uncertainty. Several factors could cause actual environmental liabilities to exceed the current estimates:
Remediation Cost Escalation. The negotiated remediation figure for Ridgecrest ($198.6 million) represents a compromise between TMC's estimate of $187.5 million and EPA's estimate of $224.0 million. If actual site conditions prove more challenging than anticipated — for example, if additional contamination is discovered during remediation, if selected remedies fail to achieve performance standards, or if regulatory requirements are tightened — actual remediation costs could exceed the negotiated figure. Similarly, the remediation cost estimates for Gallatin, Bonanza Creek, and Kanawha Bend are subject to adjustment based on site conditions, technology performance, and regulatory changes. The consent decree is expected to include a reopener provision that would allow the EPA to seek additional remediation if previously unknown conditions are discovered, potentially increasing TMC's liability beyond the negotiated figures.
Additional Regulatory Actions. TMC operates fourteen mines and six chemical processing facilities across multiple jurisdictions. It is possible that additional environmental liabilities could arise at facilities not currently implicated in the EPA/DOJ enforcement action. Any such additional liabilities would increase TMC's aggregate Environmental Liabilities for covenant compliance purposes, reducing headroom.
Stipulated Penalties. The consent decree's stipulated penalty provisions impose escalating daily penalties for noncompliance: $1,500 per day for the first 30 days of a violation, $3,000 per day for days 31 through 60, and $5,500 per day thereafter, on a per-violation basis. While we do not currently anticipate that TMC will incur material stipulated penalties, a sustained period of noncompliance with remediation milestones — whether due to technical difficulties, contractor performance issues, or regulatory disputes — could result in the accumulation of significant penalty amounts. For example, a single violation persisting for one year could result in stipulated penalties of approximately $1.9 million; multiple concurrent violations could multiply this figure substantially.
Natural Resource Damages. The current consent decree framework does not include a comprehensive resolution of natural resource damages ("NRD") claims. The federal and state natural resource trustees may pursue NRD claims separately, which could result in additional liabilities not currently reflected in our analysis. This is a particular concern at the Ridgecrest site, where historic mining operations have caused significant impacts to the Flint Creek watershed and associated fisheries.
C. Exchange Rate Risk
TMC's Environmental Liabilities are denominated in U.S. dollars, while the covenant threshold is calculated based on CNTA, which is reported in Canadian dollars. Movements in the CAD/USD exchange rate directly affect the CAD-equivalent of TMC's Environmental Liabilities and, consequently, the available covenant headroom.
As this table illustrates, a weakening of the Canadian dollar against the U.S. dollar would increase the CAD-equivalent of TMC's Environmental Liabilities, thereby reducing covenant headroom. However, even at a significantly weaker exchange rate of C$1 = US$0.65 (representing an approximately 12% depreciation from the current rate), TMC would retain headroom of approximately C$349.4 million — well within the covenant threshold. Exchange rate risk is therefore a moderating factor but not a near-term threat to covenant compliance.
D. Impact of Consent Decree Entry on Covenant Triggering Events
The entry of the consent decree, which is targeted for May 15, 2025, will almost certainly constitute a "material agreement" and a "material litigation event" under the Credit Agreement's defined terms, thereby triggering an obligation to deliver an updated compliance certificate to Harborstone. The Credit Agreement requires delivery of a compliance certificate within fifteen (15) business days of the occurrence of a triggering event.
TMC should prepare a draft compliance certificate well in advance of the anticipated consent decree entry date, so that it can be finalized and delivered to Harborstone promptly upon decree entry. The compliance certificate should demonstrate TMC's continued compliance with the Environmental Liability Covenant and all other financial covenants under the Credit Agreement. We recommend that the compliance certificate be accompanied by a disclosure letter providing a comprehensive summary of the consent decree terms and TMC's financial obligations thereunder. The recommended disclosures are discussed in Section VIII below.
VII. Comparison with TMC's Environmental Remediation Reserve
TMC's environmental remediation reserve, as reported in the Q3 2024 10-Q, stands at C$340.0 million (approximately US$251.4 million at the current exchange rate). This reserve reflects management's best estimate, prepared in consultation with TMC's environmental engineers and independent accountants, of the probable and reasonably estimable costs of environmental remediation at all TMC facilities, calculated in accordance with ASC 450 (Contingencies) and IAS 37 (Provisions, Contingent Liabilities and Contingent Assets).
The reserve of US$251.4 million is approximately US$158.5 million less than the estimated total nominal obligation of US$409.9 million under the anticipated consent decree. This shortfall reflects several factors: (i) the reserve was established before the consent decree terms were finalized, and was based on earlier cost estimates that did not reflect the full negotiated remediation obligations; (ii) certain components of the total nominal obligation — such as civil penalties, SEP commitments, and monitor costs — may not have been fully accrued in the reserve; and (iii) the reserve may reflect NPV-based or probability-weighted estimates rather than nominal totals, consistent with applicable accounting standards.
This shortfall will need to be addressed through one or more of the following approaches:
(a) Reserve Increase. TMC may need to increase its environmental remediation reserve to more closely match the estimated total nominal obligation of approximately US$409.9 million (C$554.4 million). Any reserve increase would be recorded as a charge to earnings in the period in which the increase is recognized, which could have implications for TMC's financial statements, earnings guidance, and other financial covenants. The timing and magnitude of any reserve increase should be coordinated with Ridgeline Accounting Partners LLP (engagement partner: Frances Whitmore, CPA, CA) and Northspire Capital Markets, Inc. (Vivian Okafor, Managing Director), taking into account the applicable accounting standards and the stage of consent decree negotiations.
(b) Reclassification of Certain Obligations. Certain components of the total nominal obligation may properly be classified as contingent liabilities rather than accrued liabilities under ASC 450 / IAS 37, depending on the probability and estimability of the underlying obligation. For example, independent monitor costs are estimates that may vary significantly from actual costs, and certain remediation cost components are subject to adjustment based on future site conditions. To the extent that these obligations are classified as contingent rather than accrued, they would be disclosed in the notes to the financial statements but would not increase the booked reserve. The accounting analysis is the subject of a separate memorandum being prepared by C&H in consultation with Ridgeline, targeted for completion on December 18, 2024.
For covenant compliance purposes, as noted in Section III.C.6 above, the Credit Agreement's definition of "Environmental Liabilities" may capture either booked reserves or total estimated obligations, depending on the interpretation applied. The more conservative reading — testing against the total estimated nominal obligation of approximately C$554.4 million — still yields substantial headroom of C$425.6 million. Accordingly, while the reserve adequacy issue is important for financial reporting and accounting purposes, it does not affect our conclusion regarding covenant compliance.
VIII. Disclosure and Notification Obligations Under the RCF
A. Mandatory Disclosure Requirements
The Credit Agreement imposes several affirmative disclosure obligations on TMC with respect to environmental matters and material litigation events. These obligations are found primarily in Article VI (Affirmative Covenants), Sections 6.02 (Financial Statements and Other Information), 6.05 (Litigation and Environmental Notices), and 6.06 (Compliance Certificates).
Material Litigation Disclosure. Section 6.05(a) requires TMC to provide prompt written notice to the Agent of any litigation, investigation, or proceeding that (i) involves a claim or potential liability in excess of C$25.0 million, or (ii) is brought by or on behalf of any governmental authority. The filing of the DOJ complaint on January 18, 2024, clearly triggered this disclosure obligation. We understand that TMC's prior counsel, Whitfield, Palmer & Goss LLP, made timely written disclosure to Harborstone of the commencement of the enforcement action, and that subsequent status updates have been provided in connection with TMC's quarterly compliance certificate deliveries. C&H is in the process of confirming the completeness and timeliness of these prior disclosures by reviewing the relevant correspondence files maintained by Whitfield, Palmer & Goss LLP.
Environmental Liability Disclosure. Section 6.05(b) requires TMC to provide prompt written notice to the Agent of any material change in the Company's environmental liabilities or environmental reserves, including any increase in estimated environmental remediation costs in excess of C$50.0 million. The consent decree terms, which establish remediation obligations and other liabilities totaling approximately US$409.9 million (C$554.4 million), will constitute a material change in TMC's environmental liabilities and will require supplemental disclosure to Harborstone upon execution or lodging of the consent decree.
Compliance Certificate Requirements. Section 6.06 requires TMC to deliver a compliance certificate to the Agent on a quarterly basis (within sixty days after each fiscal quarter-end and ninety days after each fiscal year-end) and upon the occurrence of certain triggering events. As discussed in Section VI.D above, the entry of the consent decree will constitute a triggering event requiring the delivery of an updated compliance certificate.
B. Recommended Disclosures
We recommend that TMC prepare and deliver a comprehensive disclosure letter to Harborstone National Bank, N.A. summarizing the terms of the consent decree and confirming continued compliance with the Environmental Liability Covenant. The disclosure letter should address, at a minimum, the following items:
(i) a summary of the consent decree, including the parties, the sites covered, the regulatory violations resolved, and the duration of the decree;
(ii) a detailed breakdown of TMC's financial obligations under the consent decree, including:
• total nominal remediation obligations: $343.5 million (Ridgecrest: $198.6 million; Gallatin: $42.8 million; Bonanza Creek: $63.2 million; Kanawha Bend: $38.9 million);
• civil penalties: $31.5 million, with the installment payment schedule;
• EPA past-costs reimbursement: $18.1 million;
• supplemental environmental project commitments: $12.0 million;
• independent monitor costs (estimated): $4.8 million over five years;
• grand total: $409.9 million nominal;
(iii) a description of the financial assurance package, including the $165.0 million surety bond from Ironbark Surety of America, Inc. and the $80.0 million remediation trust fund to be established with Larchfield Trust Company, N.A., totaling $245.0 million;
(iv) a covenant compliance calculation demonstrating that TMC's aggregate Environmental Liabilities of approximately C$554.4 million remain well within the covenant threshold of C$980.0 million, with headroom of approximately C$425.6 million; and
(v) a representation that TMC is in compliance with all covenants under the Credit Agreement and is not aware of any Default or Event of Default.
Timing. We recommend that the disclosure letter be prepared and delivered to Harborstone promptly after the consent decree is substantially final and before it is lodged with the court for public notice and comment. Based on the current timeline of consent decree negotiations, we anticipate that the consent decree will be substantially final in late February or early March 2025. Accordingly, we recommend targeting early March 2025 for delivery of the disclosure letter. This timing will allow TMC to demonstrate transparency and proactivity in its dealings with Harborstone, while also providing the Agent with adequate time to review the disclosure before the consent decree is lodged and becomes a matter of public record.
Coordination with Compliance Certificate. Following entry of the consent decree (target: May 15, 2025), TMC will be required to deliver an updated compliance certificate to Harborstone within fifteen (15) business days. C&H will prepare a draft compliance certificate and disclosure letter for TMC's review, in coordination with Northspire Capital Markets, Inc. on messaging and presentation. We anticipate delivering the draft documents to TMC for review by February 15, 2025.
IX. Recommendations
Based on the foregoing analysis, we offer the following recommendations:
1. Immediate: No Covenant Breach Exists or Is Anticipated. No covenant breach exists or is anticipated under current projections. TMC maintains approximately C$425.6 million of headroom under the Environmental Liability Covenant, representing utilization of only 56.6% of the available covenant capacity, even under the most conservative calculation methodology. No immediate corrective action is required.
2. Proactive Disclosure to Harborstone. Prepare a comprehensive disclosure letter to Harborstone National Bank, N.A. summarizing the consent decree terms, the Company's financial obligations thereunder, and confirming continued covenant compliance. The disclosure letter should be delivered in early March 2025, prior to the lodging of the consent decree with the court. C&H will prepare the initial draft in coordination with Northspire Capital Markets, Inc. on messaging and tone. The disclosure should be framed affirmatively, emphasizing TMC's proactive approach to resolving its environmental liabilities and the Company's continued financial strength and covenant compliance.
3. Compliance Certificate Preparation. Prepare an updated covenant compliance certificate for delivery to Harborstone upon or shortly after entry of the consent decree (target: May/June 2025). The compliance certificate should include a detailed covenant compliance calculation demonstrating continued satisfaction of the Environmental Liability Covenant and all other financial covenants under the Credit Agreement. C&H will prepare the draft compliance certificate for TMC's review, in coordination with TMC's finance team and Ridgeline Accounting Partners LLP.
4. Financial Assurance Review. Conduct a detailed review of the Credit Agreement's definitions of "Permitted Liens," "Permitted Indebtedness," "Contingent Obligations," and "Restricted Payments" to confirm that the surety bond indemnity agreement and the remediation trust fund do not trigger separate covenant issues under the negative covenant provisions. If any of the financial assurance instruments fall outside the existing covenant baskets, consider whether a limited waiver or amendment to the Credit Agreement may be prudent to accommodate the financial assurance package. C&H will complete this review and provide a supplemental memorandum addressing these issues (anticipated delivery: March 5, 2025).
5. Ongoing Monitoring. Implement a quarterly monitoring protocol to track CNTA levels, exchange rate fluctuations, and environmental liability estimates, and to ensure continued compliance with the Environmental Liability Covenant through the RCF's March 15, 2027 maturity. This monitoring should be coordinated with Carolyn Bracebridge (CFO) for financial data inputs and Gareth Linford (VP, Environmental Health & Safety) for updated remediation cost estimates. C&H will prepare a quarterly covenant compliance tracking summary for TMC's internal use and will flag any developments that could materially affect the co

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