MEMORANDUM
PRIVILEGED & CONFIDENTIAL — ATTORNEY-CLIENT COMMUNICATION This memorandum is protected by the attorney-client privilege and the work product doctrine. It is intended solely for the use of the addressees identified herein. Any disclosure, copying, distribution, or use of the contents of this memorandum by any person other than the addressees is strictly prohibited.
November 28, 2024
FROM: Harrison Wexford, Elliot Nguyen, and Grace Nakamura Calderwood & Harkness LLP One International Place, 40th Floor Boston, Massachusetts 02110
TO: Miriam Soo-Hwan Park, General Counsel, Torchlight Mining Corp. Gareth Linford, Vice President, Environmental Health & Safety, Torchlight Mining Corp. Carolyn Bracebridge, Chief Financial Officer, Torchlight Mining Corp.
CC: Beatrice Holloway, Calderwood & Harkness LLP Vivian Okafor, Managing Director, Northspire Capital Markets, Inc. Dr. Astrid Bergmann, P.E., Pinnacle Creek Environmental, LLC
RE: Financial Assurance Requirements Under RCRA and CERCLA — Multi-Site Consent Decree (United States of America and State of Montana v. Torchlight Mining Corp. et al., Civil Action No. 9:24-cv-00087-DWM)
MATTER NO.: 1039-00003
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I. Executive Summary
The purpose of this memorandum is to analyze the financial assurance obligations that will attach to Torchlight Mining Corp. ("TMC") and its U.S. subsidiaries under the proposed consent decree currently being negotiated with the United States Environmental Protection Agency ("EPA") and the United States Department of Justice ("DOJ") in connection with four sites located across Montana, Nevada, and West Virginia. The sites at issue are the Ridgecrest Copper-Molybdenum Mine (Drummond, Montana), the Gallatin Chemical Works (Belgrade, Montana), the Bonanza Creek Gold Mine (Lander County, Nevada), and the Kanawha Bend Chemical Plant (Institute, West Virginia). These sites are subject to overlapping regulatory regimes under the Resource Conservation and Recovery Act ("RCRA"), the Comprehensive Environmental Response, Compensation, and Liability Act ("CERCLA"), and the Clean Water Act ("CWA"), and the consent decree consolidates the financial assurance requirements into a single, multi-site financial assurance obligation.
The total financial assurance amount required under the consent decree is $245.0 million, based on the net present value of total remediation obligations across all four sites. This figure was derived through extensive negotiation between TMC (through its financial advisor, Northspire Capital Markets, Inc.) and EPA/DOJ, and reflects a compromise between EPA's initial position (financial assurance at the full nominal remediation cost of $343.5 million) and TMC's position (financial assurance at the NPV of future remediation expenditures, discounted at a rate of 3%).
The proposed financial assurance structure consists of two complementary instruments:
(a) A surety bond from Ironbark Surety of America, Inc. in the amount of $165.0 million (Bond No. ISA-ENV-2025-08934), representing approximately 67% of the total financial assurance obligation; and
(b) A remediation trust fund held by Larchfield Trust Company, N.A. in the amount of $80.0 million (Trust Agreement No. LTC-REM-2025-1177), representing approximately 33% of the total financial assurance obligation.
Financial assurance must be established and demonstrated to the satisfaction of EPA and the Court within ninety (90) days of the anticipated Effective Date of the consent decree. Based on the current lodging and entry timeline, we anticipate an Effective Date of approximately June 14, 2025, which would establish a financial assurance posting deadline of September 12, 2025.
This memorandum addresses the following topics in detail:
(a) the statutory and regulatory bases for financial assurance under RCRA and CERCLA;
(b) the categories of acceptable financial assurance instruments and their respective advantages and disadvantages;
(c) the calculation of the required financial assurance amount, including the site-by-site NPV analysis;
(d) the proposed surety-bond-plus-trust-fund structure and the rationale for the 67/33 allocation split;
(e) the annual adjustment mechanisms required under the consent decree;
(f) the interaction of the financial assurance structure with TMC's existing syndicated revolving credit facility (C$750.0 million RCF with Harborstone National Bank, N.A.) and TMC's environmental insurance coverage (Meridian Environmental Insurance Company PLL Policy No. MEI-ENV-2021-04738); and
(g) our recommendations for proceeding with the financial assurance structure in advance of the consent decree lodging target of February 19, 2025.
In summary, we recommend that TMC proceed with the surety-bond-plus-trust structure as the optimal means of satisfying the consent decree's financial assurance requirements. This structure balances TMC's need to preserve liquidity and maintain covenant compliance under the Harborstone RCF against EPA's insistence on robust, readily enforceable financial assurance mechanisms. The sections that follow provide the analytical basis for this recommendation.
II. Background
A. The Four Sites and Associated Regulatory Programs
The consent decree encompasses four sites across three states, each subject to distinct but overlapping regulatory programs. The following provides a summary of each site, its operational history, regulatory status, and the remediation costs negotiated under the proposed consent decree.
1. Ridgecrest Copper-Molybdenum Mine
The Ridgecrest Copper-Molybdenum Mine is located at 14200 Ridgecrest Mine Road, Drummond, Granite County, Montana 59832. The property comprises approximately 3,200 acres of mine footprint within a total controlled property area of approximately 8,700 acres. The Ridgecrest Mine is a large-scale open-pit copper-molybdenum mining operation that was operational from 1978 through 2019, at which time active mining ceased and the facility entered a closure and reclamation phase. The mine site includes open pits, waste rock dumps, tailings storage facilities, a solvent-extraction/electrowinning ("SX/EW") circuit, process water management systems, and associated infrastructure.
The Ridgecrest site has been proposed for listing on the National Priorities List ("NPL") under CERCLA, reflecting the magnitude of the environmental contamination associated with historic and ongoing releases of acid mine drainage, heavy metals (including copper, arsenic, cadmium, lead, and zinc), and sulfate to surface water and groundwater. The site is currently subject to an Administrative Order on Consent ("AOC") under CERCLA, Docket No. CERCLA-08-2022-0039, which was executed on September 15, 2022. Under the AOC, TMC agreed to undertake certain removal actions and provide access for EPA-directed investigations.
The alleged violations at Ridgecrest include violations of Section 301 of the Clean Water Act (unauthorized discharges of pollutants to the Clark Fork River and Flint Creek tributaries), Section 3004 of RCRA (management of hazardous waste, including SX/EW circuit wastes and waste solvents), and Section 107 of CERCLA (liability for response costs). EPA has undertaken removal actions at the site during the 2021–2023 period, incurring past costs of $14.3 million, which are subject to cost recovery under the consent decree. The negotiated prospective remediation cost for the Ridgecrest site is $198.6 million (nominal) over a 30-year remediation period, with a net present value at a 3% discount rate of $134.9 million. Ridgecrest represents the largest single component of the financial assurance obligation and is the most complex site from both a technical and regulatory perspective.
2. Gallatin Chemical Works
The Gallatin Chemical Works is located at 8800 Industrial Park Lane, Belgrade, Gallatin County, Montana 59714. The facility occupies approximately 145 acres and is engaged in the manufacture of specialty chemicals used in the mining industry, including flotation reagents, sodium xanthate, and dithiophosphate collectors. The facility has been in continuous operation since 1993 and is currently active.
The Gallatin Chemical Works is a RCRA-permitted facility operating under Permit No. MTD098712456, which governs the treatment, storage, and disposal of hazardous wastes generated by the manufacturing process. Three Solid Waste Management Units ("SWMUs") have been identified at the facility through the RCRA Corrective Action process, including a former surface impoundment, a contaminated soil area adjacent to the xanthate production building, and a groundwater plume containing volatile organic compounds and heavy metals.
The alleged violations at the Gallatin Chemical Works include violations of RCRA Sections 3004 and 3005 (improper management and storage of hazardous waste, and operation without full compliance with permit conditions) and Section 301 of the Clean Water Act (unauthorized discharges to a tributary of the East Gallatin River). The estimated remediation cost for the Gallatin Chemical Works is $42.8 million (nominal) over a 15-year remediation period, with a net present value at 3% of $34.1 million.
3. Bonanza Creek Gold Mine
The Bonanza Creek Gold Mine is located on County Road 447, Mile Marker 12, in Lander County, Nevada 89820. The property comprises approximately 5,600 acres of mine footprint within a total area of approximately 12,400 acres. The Bonanza Creek Mine is an open-pit heap-leach gold mining operation that has been in active production since 2001 and continues to operate as an active mining site.
The Bonanza Creek site is subject to RCRA corrective-action requirements in connection with the management of heap-leach pads, process solution ponds, and associated waste streams. In addition, the site is the subject of Clean Water Act enforcement actions arising from three documented releases from the heap-leach facility: a March 2022 release of approximately 180,000 gallons of pregnant leach solution from a compromised liner system; an August 2022 release of approximately 95,000 gallons of barren solution due to pipe failure; and a January 2023 release of approximately 42,000 gallons of process solution caused by storm-related overtopping of containment structures. These releases resulted in contamination of surface water drainages and the death of seventeen migratory birds in violation of the Migratory Bird Treaty Act ("MBTA"). The estimated remediation cost for the Bonanza Creek Gold Mine is $63.2 million (nominal) over a 20-year remediation period, with a net present value at 3% of $47.1 million.
4. Kanawha Bend Chemical Plant
The Kanawha Bend Chemical Plant is located at 2200 Chemical Valley Road, Institute, Kanawha County, West Virginia 25112. The facility occupies approximately 78 acres and is engaged in chemical manufacturing, including the production of leaching agents and the regeneration of sulfuric acid. The facility has been in continuous operation since 1985 and is currently active.
The Kanawha Bend facility is a RCRA-permitted facility operating under Permit No. WVD048823915. In 2020, EPA conducted an emergency response at the facility following a release of sulfuric acid and contaminated process water from a failed storage vessel, incurring response costs of $3.8 million. The facility has been the subject of ongoing RCRA corrective-action activities to address soil and groundwater contamination from historical operations.
The alleged violations at the Kanawha Bend Chemical Plant include violations of RCRA Sections 3004 and 3005 (improper management and storage of hazardous waste) and Section 107 of CERCLA (liability for response costs associated with the 2020 emergency response). The estimated remediation cost for the Kanawha Bend Chemical Plant is $38.9 million (nominal) over a 20-year remediation period, with a net present value at 3% of $29.0 million.
B. Responsible Entities
Five corporate entities are named as defendants in Civil Action No. 9:24-cv-00087-DWM and are parties to the proposed consent decree. Each entity bears joint and several liability for the remediation obligations and financial assurance requirements under the decree. The entities are as follows:
Torchlight Mining Corp. ("TMC") is a corporation organized under the Canada Business Corporations Act ("CBCA"), serving as the ultimate parent company of the Torchlight group of companies. TMC is publicly traded on the Toronto Stock Exchange and the New York Stock Exchange under the ticker symbol "TRC." TMC's headquarters are located at 1800 Bayfield Tower, 401 Bay Street, Toronto, Ontario M5H 2Y4, Canada. As the parent company, TMC provides the corporate guarantee that underpins the surety bond and trust fund arrangements discussed in this memorandum.
Torchlight Mining (U.S.) Inc. ("TM(US)") is a corporation organized under the laws of the State of Delaware, with Employer Identification Number 83-2047156. TM(US) is a wholly owned subsidiary of TMC and serves as the direct operator of TMC's mining operations in the United States. TM(US) is the entity that holds the operating permits and is the primary responsible party for day-to-day compliance at the Ridgecrest and Bonanza Creek mine sites.
Torchlight Specialty Chemicals, Inc. ("TSC") is a corporation organized under the laws of the State of Delaware, with Employer Identification Number 47-3819204. TSC is a wholly owned subsidiary of TM(US) and is the operator of the Gallatin Chemical Works and the Kanawha Bend Chemical Plant. TSC holds the RCRA permits for both chemical manufacturing facilities.
Ridgecrest Mine Holdings, LLC is a limited liability company organized under the laws of the State of Montana, with Montana Secretary of State ID No. E1042738. Ridgecrest Mine Holdings, LLC is wholly owned by TM(US) and holds the real property and mineral rights associated with the Ridgecrest Copper-Molybdenum Mine.
Bonanza Creek Mining, LLC is a limited liability company organized under the laws of the State of Nevada, with Nevada Secretary of State Entity No. E0518294731. Bonanza Creek Mining, LLC is wholly owned by TM(US) and holds the real property, mineral rights, and water rights associated with the Bonanza Creek Gold Mine.
All five entities are named as defendants in the civil action and are designated as "Settling Defendants" under the proposed consent decree. The consent decree imposes joint and several financial assurance obligations on all Torchlight entities, meaning that each entity is independently liable for the full $245.0 million financial assurance obligation, regardless of the allocation of site-specific remediation responsibilities among the subsidiaries.
C. Consent Decree Framework
The consent decree is being negotiated in the context of United States of America and State of Montana v. Torchlight Mining Corp. et al., filed in the United States District Court for the District of Montana, Missoula Division, Civil Action No. 9:24-cv-00087-DWM, before the Honorable Donald W. Molloy. The complaint, filed jointly by DOJ on behalf of EPA and by the State of Montana, asserts claims under RCRA, CERCLA, the CWA, and the MBTA.
The aggregate financial obligations under the consent decree, as currently drafted, are substantial and encompass several categories of payments and undertakings. The following table summarizes the decree's total financial commitments:
The remediation costs break down by site as follows: $198.6 million for Ridgecrest, $42.8 million for Gallatin, $63.2 million for Bonanza Creek, and $38.9 million for Kanawha Bend. The civil penalties of $31.5 million are allocated as follows: $14.2 million for Ridgecrest, $5.8 million for Gallatin, $7.9 million for Bonanza Creek, and $3.6 million for Kanawha Bend. The EPA past-cost reimbursement of $18.1 million comprises $14.3 million for removal actions at Ridgecrest (2021–2023) and $3.8 million for the emergency response at Kanawha Bend (2020). The SEPs total $12.0 million and include a $5.5 million Flint Creek watershed restoration project, a $3.5 million Battle Mountain community water supply project, and a $3.0 million Institute community health monitoring program. The independent monitor — to be appointed by the Court from a list of qualified candidates — is estimated to cost approximately $960,000 per year over a five-year initial monitoring period, for a total estimated cost of $4.8 million.
Of these aggregate obligations, only the remediation costs are subject to the financial assurance requirement. The $245.0 million financial assurance figure is derived from the NPV of the remediation obligations, as discussed in greater detail in Section V below. Civil penalties, past-cost reimbursement, SEPs, and independent monitor costs are addressed through separate payment and enforcement mechanisms within the consent decree.
The consent decree requires that financial assurance be posted within ninety (90) days of the Effective Date. The Effective Date is defined in the consent decree as the date that is thirty (30) days after entry of the consent decree by the Court. Based on the current timeline, in which the consent decree is expected to be lodged with the Court in February 2025 and entered by approximately May 15, 2025, the Effective Date would be approximately June 14, 2025, establishing a financial assurance posting deadline of September 12, 2025.
III. Statutory and Regulatory Bases for Financial Assurance
A. RCRA Financial Assurance Requirements
The Resource Conservation and Recovery Act, as amended, provides EPA with broad authority to require financial assurance from owners and operators of hazardous waste treatment, storage, and disposal ("TSD") facilities. Section 3004(a)(6) of RCRA, codified at 42 U.S.C. § 6924(a)(6), directs EPA to promulgate regulations establishing performance standards for hazardous waste facilities that include requirements for "satisfactory financial assurance for closure, post-closure monitoring and corrective action." This statutory mandate is implemented through a comprehensive regulatory framework set forth in 40 C.F.R. Part 264, Subpart H (§§ 264.140 through 264.151), which establishes the financial assurance requirements applicable to owners and operators of permitted hazardous waste management facilities.
The RCRA financial assurance requirements serve three principal purposes: (i) ensuring that adequate funds are available to close hazardous waste management facilities in a manner protective of human health and the environment; (ii) ensuring that adequate funds are available to conduct post-closure care for a period of thirty (30) years following closure, including groundwater monitoring, leachate collection, and maintenance of engineered caps and covers; and (iii) ensuring that adequate funds are available to perform corrective action at SWMUs identified at the facility.
Four of the Torchlight sites are subject to RCRA financial assurance requirements. The Gallatin Chemical Works and the Kanawha Bend Chemical Plant are both RCRA-permitted TSD facilities, operating under Permit Nos. MTD098712456 and WVD048823915, respectively, and are therefore directly subject to the financial assurance requirements of 40 C.F.R. Part 264, Subpart H. In addition, the Ridgecrest Mine has RCRA corrective-action obligations arising from the management of hazardous wastes generated by the SX/EW circuit, including spent organic solvents and electrolyte solutions. The Bonanza Creek Gold Mine likewise has RCRA corrective-action obligations associated with the management of spent heap-leach ore and cyanide-bearing process solutions.
Under the RCRA regulations, cost estimates for closure, post-closure care, and corrective action must be updated annually and adjusted for inflation. Specifically, 40 C.F.R. § 264.142(b) requires that the closure cost estimate be adjusted annually for inflation, and that whenever the current cost estimate exceeds the existing financial assurance amount, the owner or operator must increase financial assurance within sixty (60) days. The annual adjustment mechanism in the consent decree, discussed in Section VII below, is designed to satisfy this regulatory requirement.
B. CERCLA Financial Assurance and Cost Recovery Assurance
The Comprehensive Environmental Response, Compensation, and Liability Act, as amended, establishes a distinct but complementary framework for financial assurance in the context of Superfund cleanups. Section 107(a) of CERCLA, codified at 42 U.S.C. § 9607(a), imposes strict, joint and several liability on potentially responsible parties ("PRPs") for all costs of response incurred by the United States or a state not inconsistent with the National Contingency Plan. This liability extends to both past costs already incurred by EPA and future costs to be incurred in connection with the investigation and remediation of contaminated sites.
Section 106(b) of CERCLA, codified at 42 U.S.C. § 9606(b), authorizes EPA to require financial assurance as a condition of consent decrees and administrative orders directing PRPs to undertake response actions. The EPA has issued guidance on the use of financial assurance provisions in CERCLA consent decrees, including the Interim Guidance on Financial Assurance in Consent Decrees (2015), which sets forth EPA's policy regarding the types and amounts of financial assurance that should be required in settlements of CERCLA liability.
Two of the Torchlight sites are subject to CERCLA-specific financial assurance requirements. The Ridgecrest Mine, which has been proposed for NPL listing, is the primary CERCLA site, with $14.3 million in past-cost recovery and $198.6 million in prospective remediation costs. The Kanawha Bend Chemical Plant is also subject to CERCLA Section 107 liability in connection with the $3.8 million in past costs incurred by EPA during the 2020 emergency response.
Under CERCLA, financial assurance secures three principal categories of obligations: (i) payment of future response costs as they are incurred during remedy implementation; (ii) reimbursement of past EPA costs, which in this case total $18.1 million (although, as discussed below, the past-cost reimbursement is payable as a lump sum and is not itself secured by the $245.0 million financial assurance); and (iii) performance of remedy construction and long-term operation and maintenance ("O&M") activities.
C. Consent Decree-Specific Financial Assurance Provisions
The proposed consent decree, as currently drafted, contains a dedicated Financial Assurance section (Section XIX of the decree) that imposes specific requirements on TMC and its subsidiaries. The key provisions of this section are as follows:
The consent decree requires TMC to demonstrate and maintain financial assurance in the aggregate amount of $245.0 million. This figure is derived from the net present value of total remediation obligations across all four sites ($245.1 million, calculated at a 3% discount rate), rounded to the nearest $5.0 million for administrative convenience. The NPV approach was the product of protracted negotiation between the parties. EPA initially sought financial assurance at the full nominal (undiscounted) total of $343.5 million, arguing that the financial assurance should cover the total estimated cost of remediation regardless of the time value of money. TMC, through Northspire Capital Markets, argued that an NPV approach was appropriate because the remediation costs will be incurred over periods ranging from 15 to 30 years, and that requiring financial assurance at nominal amounts would overstate the present-day financial commitment. The parties ultimately agreed to the NPV methodology at a 3% discount rate, yielding the $245.0 million figure (as rounded).
The consent decree specifies the following categories of acceptable financial assurance instruments: (a) a surety bond; (b) a trust fund; (c) an irrevocable standby letter of credit; (d) a qualifying environmental impairment liability insurance policy meeting EPA requirements; (e) a self-insurance demonstration through a financial test or corporate guarantee; or (f) any combination of the foregoing. These categories are generally consistent with the instruments authorized under 40 C.F.R. Part 264, Subpart H, although the consent decree permits EPA to impose additional conditions on the terms and form of any instrument accepted.
TMC has elected to satisfy its financial assurance obligations through a combination of a surety bond and a trust fund, as described in detail in Section VI below. Notably, EPA has indicated during negotiations that it would not accept a stand-alone financial test or self-insurance demonstration, given the magnitude of the total obligations (approximately $410 million in nominal terms), the multi-site and multi-statute nature of the matter, and the complications associated with enforcing a financial test against a Canadian-domiciled parent corporation. This position is consistent with EPA's general approach in large, complex consent decrees, where the agency has shown a preference for third-party financial assurance mechanisms that provide independent credit support and are not dependent solely on the continued financial health of the settling party.
IV. Acceptable Financial Assurance Instruments — Analysis
This Section analyzes each category of financial assurance instrument that is potentially available to TMC, including the instrument selected (surety bond and trust fund) and those that were considered but not adopted (letter of credit, insurance, and financial test). For each instrument, we address the applicable regulatory requirements, the terms available to TMC, and the advantages and disadvantages of the instrument in the context of TMC's specific circumstances.
A. Surety Bond
The RCRA regulations authorize the use of a surety bond as a financial assurance mechanism for closure (40 C.F.R. § 264.143(b)) and post-closure care (40 C.F.R. § 264.145(b)). A surety bond may take the form of either a performance bond (guaranteeing that the principal will perform the required remedial work) or a payment bond (guaranteeing that funds will be available to pay for the required remedial work). In the CERCLA context, the consent decree likewise permits the use of a surety bond as a qualifying instrument.
Under the RCRA regulations, a surety bond must be issued by a surety company that is listed on the United States Department of the Treasury's Circular 570, Companies Holding Certificates of Authority as Acceptable Sureties on Federal Bonds and as Acceptable Reinsuring Companies. This requirement ensures that the surety has been vetted by the Treasury Department and maintains sufficient financial capacity to support its bonding obligations. Additionally, the bond must be in the form prescribed by the EPA model surety bond language set forth at 40 C.F.R. § 264.151(c).
TMC has secured a preliminary commitment for a surety bond from Ironbark Surety of America, Inc., a New York corporation and U.S. subsidiary of Ironbark Surety Group, Ltd. (Bermuda). Ironbark is confirmed as listed on Treasury Circular 570, and its Treasury-listed underwriting limit is adequate to support the proposed $165.0 million bond amount. The Ironbark relationship is being managed by Thomas Rennick, account executive, at Ironbark's offices at 599 Lexington Avenue, 26th Floor, New York, New York 10022.
The proposed bond terms are as follows:
• Bond No.: ISA-ENV-2025-08934
• Face Amount: $165,000,000
• Annual Premium: 1.85% of face value = $3,052,500 per year
• Principal: Torchlight Mining Corp., Torchlight Mining (U.S.) Inc., Torchlight Specialty Chemicals, Inc., Ridgecrest Mine Holdings, LLC, and Bonanza Creek Mining, LLC (jointly and severally)
• Obligee: United States Environmental Protection Agency
• Form: Performance surety bond guaranteeing TMC's performance of remedial obligations under the consent decree
• Term: Renewable annually; initial term of one year from issuance; automatic renewal unless 120 days' advance written notice of non-renewal by Ironbark
• Indemnity Agreement: TMC parent corporation and TM(US) to provide a general indemnity agreement to Ironbark, including a pledge of certain collateral (terms to be negotiated)
The bond form must conform to the EPA model surety bond language set forth at 40 C.F.R. § 264.151(c). Calderwood & Harkness has reviewed the preliminary bond form provided by Ironbark and identified several areas in which the Ironbark standard form departs from the EPA model language. These departures are being addressed in ongoing negotiations with Ironbark, and we anticipate reaching agreement on conforming language by mid-January 2025.
The indemnity agreement is a critical component of the surety bond arrangement. Ironbark requires that TMC, as the parent corporation, and TM(US), as the principal U.S. operating entity, execute a general indemnity agreement obligating them to indemnify Ironbark against any losses arising from a draw on the bond. The indemnity agreement may also require TMC and TM(US) to pledge certain collateral, which could include a lien or security interest in specific assets. As discussed in Section VIII below, the grant of a lien or security interest in connection with the indemnity agreement could implicate the negative pledge provisions and restrictions on liens contained in TMC's existing Harborstone RCF.
Advantages of the surety bond include: preservation of TMC's liquidity, as the bond does not require an upfront cash deposit beyond the annual premium payment; a relatively modest annual cost ($3.0525 million per year at the 1.85% rate); and the implicit credit assessment provided by Ironbark's willingness to underwrite the bond, which may be viewed favorably by EPA as evidence of TMC's financial capacity.
Disadvantages include: the ongoing annual premium cost, which will aggregate to significant expenditure over the multi-decade remediation period; renewal risk, as Ironbark retains the right to decline renewal upon 120 days' notice; the potential for premium increases if TMC's credit profile deteriorates or if the environmental risk assessment is revised upward; and the requirement for an indemnity agreement that may create lien and covenant complications under the Harborstone RCF.
B. Trust Fund
The RCRA regulations authorize the use of a trust fund as a financial assurance mechanism for closure (40 C.F.R. § 264.143(a)) and post-closure care (40 C.F.R. § 264.145(a)). A trust fund involves the establishment of a segregated pool of assets, held by a qualified financial institution as trustee, dedicated exclusively to the payment of closure, post-closure care, or corrective action costs. The trust must comply with the EPA model trust agreement set forth at 40 C.F.R. § 264.151(a).
TMC has selected Larchfield Trust Company, N.A., a national banking association regulated by the Office of the Comptroller of the Currency ("OCC"), with its principal office at 200 South Tryon Street, Suite 1100, Charlotte, North Carolina 28202, as the proposed trustee. The trust relationship is being managed by David Henshaw, trust officer.
The proposed trust terms are as follows:
• Trust Agreement No.: LTC-REM-2025-1177
• Initial Deposit: $80,000,000, to be funded within 90 days of the Effective Date (i.e., by September 12, 2025)
• Grantor: Torchlight Mining Corp.
• Beneficiary: United States Environmental Protection Agency
• Trust Officer: David Henshaw
• Investment Authority: Trustee to invest in accordance with approved investment policy, limited to: U.S. Treasury obligations, government agency securities, investment-grade corporate bonds with maturity not exceeding five (5) years, and money market funds invested exclusively in U.S. government securities
• Disbursements: Only upon written authorization by EPA Project Coordinators (Dr. Samuel Tesfaye for Ridgecrest and Gallatin sites; Jennifer Whitfield for Bonanza Creek site) or by order of the Court
• Reporting: Quarterly statements to TMC, EPA, and the independent monitor (Verdant Analytics, Inc., Dr. Kamal Osei)
• Trustee Compensation: Per Larchfield's published fee schedule; estimated at approximately 0.05% of trust corpus per annum ($40,000 per year on an $80.0 million corpus)
• Irrevocability: The trust is irrevocable until such time as EPA certifies completion of all remedial obligations and the consent decree is terminated by the Court
The trust fund structure requires that disbursements from the trust be made only upon prior written authorization by the designated EPA Project Coordinators or pursuant to an order of the Court. The trustee, Larchfield Trust Company, is obligated to verify that proper EPA authorization has been obtained before releasing any funds for remediation expenditures. This disbursement control mechanism provides EPA with a high degree of assurance that trust assets will be directed exclusively to their intended purpose.
Advantages of the trust fund include: the provision of a segregated, dedicated pool of assets that is immediately available for remediation expenditures upon EPA authorization; reduction of counterparty risk as compared to a surety bond (i.e., the trust fund is not dependent on the continued willingness or financial capacity of a third-party surety); and the ability of trust assets to generate investment income that can be applied to future remediation costs or used to reduce future contributions.
Disadvantages include: the requirement for an upfront cash deposit of $80.0 million, which will reduce TMC's available liquidity; the classification of the trust deposit as a restricted asset on TMC's balance sheet, which will affect financial reporting and potentially implicate minimum-liquidity covenants; and the irrevocability of the trust, which means that TMC will not have access to the trust funds for any purpose other than remediation until EPA certifies completion and the decree is terminated.
C. Letter of Credit
The RCRA regulations authorize the use of an irrevocable standby letter of credit as a financial assurance mechanism, pursuant to 40 C.F.R. § 264.143(c). A letter of credit is issued by a regulated financial institution and commits the issuing bank to pay the beneficiary (EPA) upon presentation of specified documents, typically including a sight draft and a certification by the beneficiary that the principal has failed to perform its remediation obligations.
TMC has not selected a letter of credit as part of its financial assurance structure. However, this instrument remains available as an alternative or supplement should circumstances change — for example, if the Ironbark surety bond becomes unavailable or if EPA requires a modification to the financial assurance structure.
A letter of credit for this purpose would require TMC to secure the instrument from a bank acceptable to EPA. TMC's existing relationship with Harborstone National Bank, N.A. would make Harborstone the logical issuing bank; however, the issuance of a standby letter of credit would count against TMC's available borrowing capacity under the C$750.0 million syndicated revolving credit facility and would likely reduce the amount available for working capital and other corporate purposes. In addition, depending on the terms of the RCF, the issuance of a standby letter of credit for environmental financial assurance purposes may require the consent of the syndicate lenders and may implicate specific sub-limits for letters of credit within the RCF structure.
Given the significant impact on TMC's borrowing capacity and the availability of more efficient alternatives (i.e., the surety bond), we do not recommend a letter of credit at this time.
D. Insurance
The RCRA regulations permit the use of an environmental impairment liability insurance policy as a financial assurance mechanism, pursuant to 40 C.F.R. § 264.143(e). To qualify as a financial assurance instrument, the policy must meet specific EPA requirements, including coverage limits at least equal to the required financial assurance amount, a deductible structure that meets EPA specifications, and issuance by an insurer acceptable to EPA.
TMC's existing environmental insurance coverage — a Pollution Legal Liability ("PLL") policy issued by Meridian Environmental Insurance Company, Policy No. MEI-ENV-2021-04738 — does not qualify as a financial assurance instrument for several reasons:
(i) The policy period has expired. The Meridian PLL policy covered the period from July 1, 2021 through July 1, 2024. As of the date of this memorandum, the policy is no longer in force.
(ii) The policy limits are insufficient. The per-occurrence limit of $50.0 million and aggregate limit of $75.0 million are far below the $245.0 million financial assurance requirement.
(iii) The self-insured retention ("SIR") does not meet EPA requirements. The Meridian policy carries an SIR of $5.0 million per occurrence, which does not satisfy EPA's requirements for financial assurance insurance policies, which typically require a first-dollar coverage structure or a significantly lower deductible.
(iv) Coverage disputes are pending. Meridian has denied coverage for the Ridgecrest site (invoking the pollution/known-conditions exclusion in the policy) and the Kanawha Bend site (asserting late notice of the claim). These coverage disputes are the subject of ongoing litigation and a separate coverage dispute strategy memorandum is forthcoming from this office.
For these reasons, insurance is not a viable financial assurance mechanism in the present circumstances. However, as discussed in Section IX below, potential insurance recoveries from Meridian — if the coverage disputes are resolved favorably — may reduce TMC's out-of-pocket remediation expenditures and could potentially support future reductions in the financial assurance amount through the annual adjustment mechanism.
E. Financial Test / Self-Insurance (Corporate Guarantee)
The RCRA regulations provide for a self-insurance mechanism, commonly referred to as the "financial test" or "corporate guarantee," under 40 C.F.R. § 264.143(f). This mechanism permits an owner or operator to demonstrate financial assurance by meeting specified financial criteria rather than posting a third-party instrument.
The financial test requires the applicant to satisfy either of two alternative sets of criteria:
(i) Bond-Rating Test: The applicant must hold an investment-grade rating on its most recent unsecured bond issuance from a nationally recognized statistical rating organization, and must satisfy specified financial ratios, including a ratio of total liabilities to net worth of less than 2.0 and a ratio of current assets to current liabilities of greater than 1.5.
(ii) Net-Worth Test: The applicant must demonstrate net worth of at least $10.0 million, tangible net worth of at least $10.0 million, and U.S. assets amounting to at least 90% of total assets (or at least six times the amount of environmental financial assurance obligations, whichever is greater).
In addition, 40 C.F.R. § 264.143(f)(10) requires that the applicant's tangible net worth be at least six times the sum of all environmental financial assurance obligations currently covered by a financial test.
TMC's financial metrics as of FY2023 are as follows:
• Revenue: C$4.82 billion (approximately US$3.56 billion at a C$1 = US$0.7394 exchange rate)
• EBITDA: C$1.14 billion (approximately US$843 million)
• Market capitalization: approximately C$7.6 billion
• Consolidated net tangible assets ("CNTA") as of Q3 2024: C$3.92 billion
On a preliminary basis, TMC might technically qualify for the financial test on a standalone basis, particularly under the bond-rating test (assuming TMC holds an investment-grade credit rating, which would need to be confirmed). However, several factors counsel strongly against relying on the financial test as the primary financial assurance mechanism:
First, EPA has communicated unambiguously during negotiations that it will not accept a stand-alone financial test in this case. EPA's position is based on: (a) the multi-site, multi-statute nature of the environmental exposure, which in EPA's view increases the risk that TMC's financial condition could deteriorate in correlation with the environmental liabilities themselves; (b) the total nominal obligations of $409.9 million, which EPA views as too large to secure through self-insurance alone; and (c) TMC's Canadian domicile, which creates enforcement complications in the event that TMC fails to perform its remediation obligations (including the need for cross-border enforcement of any judgment or order).
Second, even if EPA were willing to accept a financial test, the qualification analysis is complex and subject to change. TMC's financial metrics may fluctuate with commodity prices, exchange rates, and other factors beyond TMC's control, creating a risk that TMC could fail the financial test at a future measurement date and be required to post alternative financial assurance on short notice.
For these reasons, we recommend that TMC not pursue the financial test as its primary or sole financial assurance mechanism. The surety-plus-trust structure provides a more certain path to EPA acceptance and avoids the litigation risk associated with contested financial test qualifications.
F. Combination of Instruments
The RCRA regulations expressly permit the use of any combination of the above financial assurance mechanisms, pursuant to 40 C.F.R. § 264.143(g), provided that the aggregate value of all instruments equals or exceeds the required financial assurance amount. This flexibility allows owners and operators to tailor their financial assurance structure to their specific circumstances, balancing considerations of cost, liquidity, risk, and regulatory acceptability.
TMC has elected a combination of a surety bond ($165.0 million) and a trust fund ($80.0 million), totaling $245.0 million. This combination approach provides the best overall balance of the competing considerations identified above. The surety bond covers the larger portion of the financial assurance obligation while requiring only annual premium payments rather than an upfront cash outlay, thereby preserving TMC's liquidity. The trust fund provides EPA with the security of a segregated, dedicated pool of assets that is immediately available for remediation expenditures, addressing EPA's concern about the need for accessible, liquid financial assurance. The rationale for the specific 67/33 allocation between the surety bond and the trust fund is discussed in Section VI.D below.
V. Calculation of Required Financial Assurance Amount
A. Methodology
The consent decree requires TMC to demonstrate and maintain financial assurance in an amount sufficient to cover the estimated cost of completing the remedial actions at all four sites. The required amount is $245.0 million, derived from the net present value ("NPV") of total remediation obligations across all sites, calculated at a 3% discount rate.
The NPV methodology was the subject of extensive negotiation between the parties. EPA initially sought financial assurance at the full nominal (undiscounted) remediation cost of $343.5 million, arguing that the financial assurance should reflect the total dollar amount that will ultimately be expended on remediation, regardless of when those expenditures occur. TMC, through its financial advisor Northspire Capital Markets, Inc., argued that an NPV approach was appropriate on several grounds: the remediation costs will be incurred over periods ranging from 15 to 30 years; the financial assurance instruments (particularly the trust fund) will generate investment returns over the interim period; and requiring financial assurance at nominal amounts would effectively require TMC to over-collateralize its obligations relative to the present-day value of those obligations.
After several rounds of negotiation and the exchange of supporting financial analyses, the parties agreed to adopt the NPV methodology at a 3% discount rate, which approximates the long-term real rate of return on the types of conservative investments permitted under the trust agreement. This compromise yielded a total NPV of $245.1 million, which was rounded to $245.0 million for administrative convenience.
B. Site-by-Site Breakdown
The following table sets forth the site-by-site calculation of the $245.0 million financial assurance amount:
The NPV of $245.1 million is rounded to $245.0 million for financial assurance purposes.
Several notes on the individual site calculations are warranted:
Ridgecrest. The negotiated remediation cost of $198.6 million reflects a compromise between TMC's initial estimate of $187.5 million and EPA's estimate of $224.0 million. The arithmetic midpoint was $205.75 million; the parties negotiated down to $198.6 million based on TMC's agreement to certain remedy design concessions and EPA's acceptance of TMC's more favorable cost assumptions for long-term O&M. The NPV factor of 0.6795 reflects the 30-year remediation period discounted at 3%. Importantly, the EPA past costs of $14.3 million for removal actions conducted at Ridgecrest during 2021–2023 are payable separately as a lump sum and are not included in the financial assurance calculation.
Gallatin. The estimated remediation cost of $42.8 million covers the investigation and remediation of three SWMUs at the Gallatin Chemical Works over a 15-year period. The NPV factor of 0.7969 reflects the relatively shorter remediation timeline.
Bonanza Creek. The estimated remediation cost of $63.2 million includes the costs of liner repair and replacement, heap-leach pad closure, process solution pond closure, and long-term groundwater monitoring over a 20-year period. The NPV factor of 0.7454 applies to the 20-year remediation timeframe.
Kanawha Bend. The estimated remediation cost of $38.9 million covers interim stabilization measures, soil and groundwater remediation, and long-term monitoring at the Kanawha Bend Chemical Plant over a 20-year period. As with Ridgecrest, the EPA past costs of $3.8 million for the 2020 emergency response are payable separately and are not included in the financial assurance calculation.
Detailed NPV calculations, including the year-by-year cost projections and discounting methodology for each site, are set forth in the Northspire Capital Markets workpapers attached as Appendix D.
C. Items Not Included in Financial Assurance Amount
For clarity, the following consent decree obligations are not included in the $245.0 million financial assurance amount and are secured through separate payment and enforcement mechanisms:
Civil Penalties ($31.5 million). The civil penalties are payable on a fixed schedule, with 25% of the total ($7.875 million) due in each of four annual installments beginning thirty (30) days after the Effective Date. Payment of the civil penalties is secured separately through a stipulated penalty escrow agreement administered by Larchfield Trust Company, N.A., rather than through the financial assurance instruments described in this memorandum.
EPA Past-Cost Reimbursement ($18.1 million). The EPA past-cost reimbursement is payable as a lump sum within sixty (60) days of entry of the consent decree. Because this obligation will be satisfied before the financial assurance posting deadline, it is not subject to the financial assurance requirement.
Supplemental Environmental Projects ($12.0 million). The SEPs are secured by stipulated penalties rather than separate financial assurance. The three SEPs — the Flint Creek watershed restoration project ($5.5 million), the Battle Mountain community water supply project ($3.5 million), and the Institute community health monitoring program ($3.0 million) — are subject to specific performance milestones and completion deadlines, with stipulated penalties accruing for failure to meet those requirements.
Independent Monitor Costs ($4.8 million estimated). The costs of the independent monitor, Verdant Analytics, Inc., are paid as incurred and are not secured by financial assurance. The estimated five-year cost of $4.8 million (approximately $960,000 per year) is based on the scope of work outlined in the consent decree.
The grand total of all consent decree obligations is $409.9 million (nominal) or $311.5 million (NPV/cash equivalent). Of this total, only the $245.0 million remediation component is secured by the financial assurance instruments described in this memorandum.
VI. Proposed Financial Assurance Structure
A. Surety Bond — $165.0 Million
The larger component of TMC's financial assurance structure is a performance surety bond in the amount of $165.0 million, to be issued by Ironbark Surety of America, Inc. The bond will guarantee TMC's performance of its remedial obligations under the consent decree, with the EPA as obligee. All five Torchlight entities will be named as principal, reflecting the joint and several nature of the consent decree obligations.
The key terms of the proposed surety bond are as follows:
Issuer. Ironbark Surety of America, Inc., a New York corporation and U.S. subsidiary of Ironbark Surety Group, Ltd. (Bermuda). Ironbark is listed on U.S. Treasury Department Circular 570 and holds a certificate of authority to issue surety bonds on federal obligations. Ironbark's Treasury-listed underwriting limit is sufficient to support the proposed $165.0 million bond amount without the need for reinsurance participation.
Bond Number. ISA-ENV-2025-08934.
Face Amount. $165,000,000.
Form. Performance surety bond, conforming to the EPA model surety bond language set forth at 40 C.F.R. § 264.151(c), guaranteeing TMC's performance of the remedial obligations specified in the consent decree.
Obligee. United States Environmental Protection Agency.
Principal. Torchlight Mining Corp., Torchlight Mining (U.S.) Inc., Torchlight Specialty Chemicals, Inc., Ridgecrest Mine Holdings, LLC, and Bonanza Creek Mining, LLC (jointly and severally).
Annual Premium. 1.85% of face value = $3,052,500 per year, payable annually in advance. The 1.85% rate reflects Ironbark's preliminary pricing based on its assessment of TMC's credit profile, the environmental risk associated with the four sites, and the anticipated duration of the remediation period. Ironbark has reserved the right to adjust the premium rate at each renewal, subject to market conditions and TMC's financial condition at the time of renewal.
Term. The bond will have an initial term of one year from the date of issuance, with automatic annual renewal unless Ironbark provides not less than one hundred twenty (120) days' advance written notice of its intent not to renew.
Indemnity Agreement. Ironbark requires that TMC (as parent) and TM(US) execute a general indemnity agreement obligating them to hold Ironbark harmless from any and all losses, costs, and expenses arising from a draw on the bond. The indemnity agreement may also require the pledge of certain collateral, the terms of which are still under negotiation. The potential lien and security interest implications of the indemnity agreement are discussed in Section VIII below.
Standby Trust. EPA regulations require that a standby trust fund be established in connection with any surety bond used for RCRA financial assurance purposes. The standby trust fund will be established at Larchfield Trust Company, N.A. and will be funded with a nominal initial deposit (typically $1.00 to $1,000). The standby trust serves as a receptacle for funds in the event that Ironbark forfeits on the bond — that is, if Ironbark is called upon to perform under the bond and elects to make payment rather than perform the remediation work, the payment would be deposited into the standby trust fund for use by EPA in conducting the remediation. This standby trust is a separate instrument from the $80.0 million remediation trust fund described in Section VI.B below.
Non-Renewal Protections. In the event that Ironbark provides notice of non-renewal, the consent decree requires TMC to obtain substitute financial assurance within ninety (90) days of receipt of the non-renewal notice. If TMC is unable to obtain substitute financial assurance within that period, TMC must deposit the full $165.0 million (or such greater amount as may then be required) into the standby trust fund. This provision is designed to ensure that there is no gap in financial assurance coverage and that EPA is protected in the event that the surety relationship is terminated.
B. Remediation Trust Fund — $80.0 Million
The smaller component of TMC's financial assurance structure is a remediation trust fund in the amount of $80.0 million, to be established at Larchfield Trust Company, N.A. The trust fund will serve as a segregated pool of assets dedicated exclusively to the payment of remediation costs at the four consent decree sites.
The key terms of the proposed trust agreement are as follows:
Trustee. Larchfield Trust Company, N.A., a national banking association regulated by the Office of the Comptroller of the Currency, with its principal office at 200 South Tryon Street, Suite 1100, Charlotte, North Carolina 28202.
Trust Agreement Number. LTC-REM-2025-1177.
Initial Deposit. $80,000,000. The initial deposit must be made within ninety (90) days of the Effective Date of the consent decree. Based on the anticipated Effective Date of June 14, 2025, the deposit deadline is September 12, 2025.
Grantor. Torchlight Mining Corp.
Beneficiary. United States Environmental Protection Agency.
Trust Officer. David Henshaw, Larchfield Trust Company, N.A.
Investment Authority. The trustee will invest the trust corpus in accordance with an approved investment policy that limits permissible investments to: (i) U.S. Treasury obligations (bills, notes, and bonds); (ii) obligations of U.S. government agencies and government-sponsored enterprises (e.g., Federal Home Loan Bank, Thackeray Holdings); (iii) investment-grade corporate bonds with maturity not exceeding five (5) years, rated at least "A" by Standard & Poor's or Moody's Investors Service; and (iv) money market funds invested exclusively in U.S. government securities. These investment restrictions are designed to preserve the principal value of the trust corpus while generating a modest return to offset inflation and defray trust administration costs.
Disbursements. Disbursements from the trust fund may be made only upon the prior written authorization of the designated EPA Project Coordinators — Dr. Samuel Tesfaye (for the Ridgecrest and Gallatin sites) and Jennifer Whitfield (for the Bonanza Creek site) — or pursuant to an order of the Court. The trustee is required to verify that proper EPA authorization has been received before releasing any funds. Disbursement requests must be accompanied by documentation supporting the remediation expenditures for which reimbursement is sought, including invoices, progress reports, and certifications from the independent monitor.
Reporting. The trustee will provide quarterly statements of the trust fund balance, investment activity, disbursements, and earned income to TMC, EPA, and the independent monitor (Verdant Analytics, Inc., Dr. Kamal Osei). Annual audited financial statements of the trust will also be prepared.
Trustee Compensation. Larchfield's published fee schedule provides for annual trustee compensation of approximately 0.05% of the trust corpus. Based on an initial corpus of $80.0 million, the estimated annual trustee fee is approximately $40,000 per year. This fee is payable from the trust corpus unless TMC elects to pay it separately.
Irrevocability. The trust is irrevocable. TMC may not withdraw, borrow against, or otherwise access the trust funds for any purpose other than payment of remediation costs authorized by EPA or the Court. The trust will remain in effect until EPA issues a written certification that all remedial obligations under the consent decree have been completed to EPA's satisfaction and the consent decree has been terminated by the Court. Upon termination of the trust, any remaining trust assets will be returned to TMC.
C. Aggregate Structure Summary
The following table summarizes the proposed financial assurance structure:
In addition to the primary instruments, the following ancillary arrangements are required:
• Standby trust fund at Larchfield Trust Company, N.A. — established in connection with the surety bond; nominal initial deposit; funded only upon surety forfeiture or TMC's failure to obtain substitute financial assurance following non-renewal
• Stipulated penalty escrow at Larchfield Trust Company, N.A. — separate agreement securing the payment of stipulated penalties under the consent decree (not part of the $245.0 million financial assurance)
D. Rationale for the 67/33 Split
The allocation of the $245.0 million financial assurance obligation between the surety bond ($165.0 million, approximately 67%) and the trust fund ($80.0 million, approximately 33%) was determined through a collaborative analysis involving Calderwood & Harkness, Northspire Capital Markets, and TMC's finance team. The principal considerations underlying this allocation are as follows:
Liquidity preservation. The surety bond covers the larger portion of the financial assurance obligation ($165.0 million) while requiring only annual premium payments of $3.0525 million rather than an equivalent upfront cash deposit. By allocating 67% of the financial assurance to the surety bond, TMC limits its upfront cash outlay to $80.0 million (the trust fund deposit) plus the first year's bond premium ($3.0525 million), for a total initial cash commitment of approximately $83.1 million — compared to the $245.0 million that would be required if the entire obligation were satisfied through a trust fund deposit.
EPA acceptability. The $80.0 million trust fund deposit represents approximately 32.6% of the total NPV remediation obligation ($245.0 million) and provides EPA with a meaningful segregated fund that is immediately available for early-phase remediation expenditures. This level of trust funding is expected to be sufficient to satisfy EPA's expressed desire for a dedicated pool of liquid assets, while recognizing that the balance of the financial assurance will be provided through the surety bond.
Early-phase remediation coverage. The $80.0 million trust deposit is calibrated to cover the anticipated near-term remediation expenditures at the four sites, including: the Ridgecrest Remedial Action Work Plan (due December 14, 2025), which is expected to require significant upfront expenditures for remedy design, pilot testing, and mobilization; the Kanawha Bend interim stabilization project (completion deadline December 14, 2026), which involves containment and treatment of contaminated groundwater; and the Bonanza Creek liner repair project (commencement deadline June 14, 2026), which involves repair and replacement of the compromised heap-leach pad liner system.