Trilogy Metals Inc.

Management’s Discussion and Analysis

(expressed in US dollars)

Cautionary notes

Forward-looking statements

This Management’s Discussion and Analysis contains “forward-looking information” and “forward-looking statements” within the meaning of Section 27A of the U.S. Securities Act of 1933, as amended, Section 21E of the U.S. Securities Exchange Act of 1934, as amended (the “Exchange Act”), and other applicable securities laws. These forward-looking statements may include statements regarding perceived merit of properties, exploration results and budgets, mineral reserves and resource estimates, work programs, capital expenditures, operating costs, cash flow estimates, production estimates and similar statements relating to the economic viability of a project, timelines, strategic plans, statements regarding the Company’s plans and expectations relating to its Upper Kobuk Mineral Projects, market prices for precious and base metals, or other statements that are not statements of fact. These statements relate to analyses and other information that are based on forecasts of future results, estimates of amounts not yet determinable and assumptions of management. Statements concerning mineral resource estimates may also be deemed to constitute “forward-looking statements” to the extent that they involve estimates of the mineralization that will be encountered if the property is developed.

Any statements that express or involve discussions with respect to predictions, expectations, beliefs, plans, projections, objectives, assumptions or future events or performance (often, but not always, identified by words or phrases such as “expects”, “is expected”, “anticipates”, “believes”, “plans”, “projects”, “estimates”, “assumes”, “intends”, “strategy”, “goals”, “objectives”, “potential”, “possible” or variations thereof or stating that certain actions, events, conditions or results “may”, “could”, “would”, “should”, “might” or “will” be taken, occur or be achieved, or the negative of any of these terms and similar expressions) are not statements of historical fact and may be forward-looking statements.

Forward-looking statements are based on a number of material assumptions, including those listed below, which could prove to be significantly incorrect:

Forward-looking statements are subject to a variety of known and unknown risks, uncertainties and other factors that could cause actual events or results to differ from those reflected in the forward-looking statements, including, without limitation:

This list is not exhaustive of the factors that may affect any of the Company’s forward-looking statements. Forward-looking statements are statements about the future and are inherently uncertain, and actual achievements of the Company or other future events or conditions may differ materially from those reflected in the forward-looking statements due to a variety of risks, uncertainties and other factors, including, without limitation, those referred to in Trilogy’s Form 10-K dated February 11, 2019, filed with the Canadian securities regulatory authorities and the SEC, and other information released by Trilogy and filed with the appropriate regulatory agencies.

The Company’s forward-looking statements are based on the beliefs, expectations and opinions of management on the date the statements are made, and the Company does not assume any obligation to update forward-looking statements if circumstances or management’s beliefs, expectations or opinions should change, except as required by law. For the reasons set forth above, investors should not place undue reliance on forward-looking statements.

Cautionary note to United States investors

Reserve and resource estimates

This Management’s Discussion and Analysis has been prepared in accordance with the requirements of the securities laws in effect in Canada, which differ from the requirements of U.S. securities laws. Unless otherwise indicated, all resource and reserve estimates included in this Management’s Discussion and Analysis have been prepared in accordance with National Instrument 43-101 Standards of Disclosure for Mineral Projects (“NI 43-101”) and the Canadian Institute of Mining, Metallurgy, and Petroleum Definition Standards on Mineral Resources and Mineral Reserves. NI 43-101 is a rule developed by the Canadian Securities Administrators which establishes standards for all public disclosure an issuer makes of scientific and technical information concerning mineral projects. Canadian standards, including NI 43-101, differ significantly from the requirements of the SEC, and resource and reserve information contained herein may not be comparable to similar information disclosed by U.S. companies. In particular, and without limiting the generality of the foregoing, the term “resource” does not equate to the term “reserves”. Under U.S. standards, mineralization may not be classified as a “reserve” unless the determination has been made that the mineralization could be economically and legally produced or extracted at the time the reserve determination is made. The SEC’s disclosure standards normally do not permit the inclusion of information concerning “measured mineral resources”, “indicated mineral resources” or “inferred mineral resources” or other descriptions of the amount of mineralization in mineral deposits that do not constitute “reserves” by U.S. standards in documents filed with the SEC. Investors are cautioned not to assume that any part or all of mineral deposits in these categories will ever be converted into reserves. U.S. investors should also understand that “inferred mineral resources” have a great amount of uncertainty as to their existence and great uncertainty as to their economic and legal feasibility. It cannot be assumed that all or any part of an “inferred mineral resource” will ever be upgraded to a higher category. Under Canadian rules, estimated “inferred mineral resources” may not form the basis of feasibility or pre-feasibility studies except in rare cases. Investors are cautioned not to assume that all or any part of an “inferred mineral resource” exists or is economically or legally mineable. Disclosure of “contained ounces” in a resource is permitted disclosure under Canadian regulations; however, the SEC normally only permits issuers to report mineralization that does not constitute “reserves” by SEC standards as in-place tonnage and grade without reference to unit measures. The requirements of NI 43-101 for identification of “reserves” are also not the same as those of the SEC, and reserves reported by the Company in compliance with NI 43-101 may not qualify as “reserves” under SEC standards. Accordingly, information concerning mineral deposits set forth herein may not be comparable with information made public by companies that report in accordance with U.S. standards.

General

This Management’s Discussion and Analysis (“MD&A”) of Trilogy Metals Inc. (“Trilogy”, “Trilogy Metals”, “the Company” or “we”) is dated April 8, 2019 and provides an analysis of our unaudited interim financial results for the quarter ended February 28, 2019 compared to the quarter ended February 28, 2018.

The following information should be read in conjunction with our February 28, 2019 unaudited interim consolidated financial statements and related notes which were prepared in accordance with United States generally accepted accounting principles (“U.S. GAAP”). The MD&A should also be read in conjunction with our audited consolidated financial statements and related notes for the year ended November 30, 2018. A summary of the U.S. GAAP accounting policies are outlined in note 2 of the audited consolidated financial statements. All amounts are in United States dollars unless otherwise stated. References to “Canadian dollars” and “C$” and “CDN$” are to the currency of Canada and references to “U.S. dollars”, “$” or “US$” are to the currency of the United States.

Andrew W. West, P.Geo., an employee and Exploration Manager, is a Qualified Person under National Instrument 43-101 - Standards of Disclosure for Mineral Projects (“NI 43-101”), and has approved the scientific and technical information in this MD&A.

Trilogy’s shares are listed on the Toronto Stock Exchange (“TSX”) and the NYSE American Stock Exchange (“NYSE American”) under the symbol “TMQ”. Additional information related to Trilogy, including our annual report on Form 10-K, is available on SEDAR at www.sedar.com and on EDGAR at www.sec.gov .

Description of business

We are a base metals exploration company focused on exploring and developing our mineral holdings in the Ambler mining district located in Alaska, U.S.A. We conduct our operations through a wholly-owned subsidiary, NovaCopper US Inc. which is doing business as Trilogy Metals US (“Trilogy Metals US”). Our Upper Kobuk Mineral Projects, (“UKMP” or “UKMP Projects”), consist of: i) the 100% owned Ambler lands which host the Arctic copper-zinc-lead-gold-silver Project (the “Arctic Project”); and ii) the Bornite lands being explored under a collaborative long-term agreement with NANA Regional Corporation, Inc. (“NANA”), a regional Alaska Native Corporation, which host the Bornite carbonate-hosted copper Project (the “Bornite Project”).

Project activities

Arctic Project

In a press release dated January 31, 2019, the Company announced that our Board of Directors approved a $7.0 million budget for the 2019 Arctic Project, focusing on feasibility level engineering and environmental work in order to complete a feasibility study in the first half of 2020, and to prepare the project for permitting. During the first quarter, the Company commenced preparations for the summer field season at the Arctic Project in addition to ongoing metallurgical studies. The Company will continue to advance engineering and environmental work in 2019 in support of completing a feasibility study. We plan to undertake additional hydrological and geotechnical work at the site this summer along with water management, tailings facility and waste rock containment analysis and design during the second half of the year. Additional metallurgical test work to verify ore hardness and grinding characteristics is currently on-going.

The Company had previously announced on February 20, 2018 the positive results of its pre-feasibility study (“Arctic PFS”) for its Arctic Project. These results convert indicated mineral resources at Arctic to probable mineral reserves.

Highlights of the Arctic PFS study are as follows:

The Arctic PFS was prepared under National Instrument 43-101 standards by independent consultant, Ausenco Engineering Canada Inc. (“Ausenco”) of Vancouver, Canada and the full technical report titled “Arctic Project, Northwest Alaska, USA, NI 43-101 technical report on Pre-Feasibility Study” and dated effective February 20, 2018 was filed on SEDAR on April 6, 2018 and on EDGAR on April 12, 2018. The Company also engaged Amec Foster Wheeler (“Amec”) to complete mine planning and SRK Consulting (Canada) Inc. (“SRK”) to complete tailings and waste design, hydrology and water management studies. Please see the Arctic PFS for additional information on the Arctic Project.

Bornite Project

In a press release dated December 13, 2018, the Company announced the final set of drill results at the Bornite Project from the 2018 exploration drill program. Assay results from these 5 remaining drill holes comprising approximately 3,024 meters from the 10,123-meter 2018 program show significant copper mineralization.

In a press release dated January 31, 2019, the Company announced that the Board of Directors approved a $9.2 million budget for the 2019 Bornite Project, focusing on additional exploration drilling consisting of a combination of infill and expansion drilling of the known deposit. South32 Limited committed to fund the entire $9.2 million budget and funds were fully received during the first quarter maintaining the Option Agreement as defined below in good standing.

In a press release dated March 5, 2019, the Company announced additional copper-cobalt metallurgical results for the Bornite Project.  Nine individual metallurgical samples have been evaluated for the recovery of copper and cobalt and the production of saleable copper concentrates.  Results are consistent with previous test results and significantly expand the metallurgical database for the project.  Hardness testing of the nine samples shows the materials are of soft to moderate hardness with copper recoveries ranging from 80.2% to 94.5% and averaged 89.7% for eight of the nine composites.  Copper concentrate grades range from 24.5% to 34.5% Cu and averaged 27.6% Cu.  Copper concentrate quality is shown to be very good with low levels of penalty elements.  Cobalt has been shown to be readily recoverable to a pyrite concentrate with grades of this concentrate in the range of 700 to 4500 g/t cobalt.  Plans are being made for the next stage of work to determine the optimal method to recover cobalt from the pyrite concentrate.

Regional Exploration Project

In a press release dated February 6, 2019, the Company announced an approved new Regional Exploration budget of $2.0 million, in addition to the $16.2 million already approved for the 2019 Bornite and Arctic Projects. The Company and South32 have agreed to equally fund the Regional Exploration budget. Funds were received during the first quarter from South32 for their $1.0 million contribution, which is in excess of the $30 million in option payments received to date. The Regional Exploration program will be focused on identifying and testing new drill targets within the Ambler Volcanogenic Massive Sulphide (“VMS”) Belt.

Corporate developments

Long-term incentives

On December 5, 2018, the Board of Directors approved the granting of 2,430,000 stock options to employees, consultants and directors with various vesting terms. As part of the annual incentive payout for the 2018 fiscal year, 225,000 restricted share units (“RSUs”) were granted to officers vesting one half on the grant date and one half on the first anniversary of the grant date.

Outlook

As previously announced, the approved budgets for the fiscal year ending November 30, 2019 total $18.2 million for its project activities at the UKMP. At the Bornite Project, we anticipate drilling approximately 7,900 meters in approximately 12 drill holes with the objective to infill and extend the underground resource. At the Arctic Project, we anticipate the need for further drilling inside the open pit to support feasibility level geotechnical and hydrology analysis required for the mine plan. Work will be focused on completing a feasibility study at Arctic with results anticipated to be released in the first half of 2020. The Company also plans to execute a regional or district exploration program during this field season. Plans are in progress to complete an aerial EM geophysics survey this spring over the Company’s 100 Km long VMS belt and, with that information, prepare for exploration drilling of certain targets this summer. The Company has started obtaining proposals for necessary contracts, engaging with local communities for the hiring of seasonal staff and working on maintenance activities at its remote camp to ready the site for this year’s busy field season.

Property review

Our principal assets, the UKMP Projects, are located in the Ambler mining district in Northwest Alaska. Our UKMP Projects comprise approximately 355,323 acres (143,794 hectares) consisting of the Ambler and Bornite lands.

Arctic Project

The Ambler lands, which host several deposits, including the high-grade copper-zinc-lead-gold-silver Arctic Project, and other mineralized targets within a 100-kilometer-long VMS belt, are owned by NovaCopper US. The Ambler lands are in Northwestern Alaska and consist of 114,500 acres (46,337 hectares) of Federal patented mining claims and State of Alaska mining claims, within which VMS mineralization has been found.

We have recorded the Ambler lands as a mineral property with acquisition costs capitalized and exploration costs expensed in accordance with our accounting policies.

Bornite Project

On October 19, 2011, Trilogy Metals US and NANA signed a collaborative agreement to explore and develop the Ambler mining district. Under the Exploration Agreement and Option to Lease (the “NANA Agreement”), we acquired, in exchange for, among other things, a $4.0 million cash payment to NANA, the exclusive right to explore the Bornite property and lands deeded to NANA through the Alaska Native Claims Settlement Act (“ANCSA”), located adjacent to the Arctic Project, and the non-exclusive right to access and entry onto NANA’s lands. The agreement establishes a framework for any future development of either the Bornite Project or the Arctic Project. Both projects are included as part of a larger area of interest set forth in the NANA Agreement. The agreement with NANA created a total land package incorporating our Ambler lands with the adjacent Bornite and ANCSA lands with a total area of approximately 355,323 acres (143,794 hectares).

Upon the decision to proceed with development of a mine within the area of interest, NANA maintains the right to purchase an ownership interest in the mine equal to between 16%-25% or retain a 15% net proceeds royalty which is payable after we have recovered certain historical costs, including capital and cost of capital. Should NANA elect to purchase an ownership interest in the mine, consideration will be payable based on the elected percentage purchased and all the costs incurred on the properties less $40.0 million, not to be less than zero. The parties would form a joint venture and be responsible for all future costs incurred in connection with the mine, including capital costs of the mine, based on each party’s pro-rata share.

NANA would also be granted a net smelter return royalty between 1% and 2.5% upon the execution of a mining lease or a surface use agreement, the amount of which is determined by the particular area of land from which production originates.

We have accounted for the Bornite property as a mineral property with acquisition costs capitalized and exploration costs expensed in accordance with our accounting policies.

South32 Option Agreement

On April 10, 2017, Trilogy and Trilogy Metals US entered into an Option Agreement to form a Joint Venture with South32 Group Operations Pty Ltd., a wholly-owned subsidiary of South32 Limited, which agreement was later assigned by South32 Operations to its affiliate, South32 USA Exploration Inc. (“South32”) on the UKMP (“Option Agreement”). Under the terms of the Option Agreement, as amended, Trilogy Metals US granted South32 the right to form a 50/50 joint venture to hold all of Trilogy Metals US’ Alaskan assets. Upon exercise of the option, Trilogy Metals US will transfer its Alaskan assets, including the UKMP, and South32 will contribute a minimum of $150 million, to a newly formed and jointly held, limited liability company (“LLC”).

To maintain the option in good standing, South32 is required to fund a minimum of $10 million per year for up to a three-year period, which funds will be used to execute a mutually agreed upon program at the UKMP. The funds provided by South32 may only be expended in accordance with an approved program by a technical committee with equal representation from Trilogy and South32. South32 may exercise its option at any time over the three-year period to enter into the 50/50 joint venture. To subscribe for 50% of the JV, South32 must contribute a minimum of $150 million, plus (i) any amounts Trilogy spends on matched parallel funding to a maximum of $16 million over the three year period and (ii) $5 million if the option is exercised between April 1, 2018 and March 31, 2019 or $10 million if the option is exercised between April 1, 2019 and the expiration date of the option, less the amount of the initial funding contributed by South32 (the “Subscription Price”). South32 has now funded the full three-year option period. South32 has until the end of January 2020 to exercise the option to form the JV LLC and make the subscription payment.

Option Funding Phase

Provided that all the exploration data and information has been made available to South32 by no later than December 31 of each year, South32 must decide by the end of January of the following year whether; (i) to fund a further tranche of a minimum of $10 million, or (ii) to withdraw and not provide any further annual funding. In years 1 and 2, if the election to fund a further tranche is not made in January, South32 has until the end of March to exercise the option to form the LLC. In year 3, South32 has until the end of January, 2020 to exercise the option to form the LLC. If South32 elects to exercise the option, the Subscription Price shall be paid in one tranche within 45 business days. Should South32 not make its annual minimum payment or elect to withdraw, the option will lapse and South32 will have no claim to ownership or the funds it had already spent. The option payment for the first year was paid by South32 in April 2017 and expended on the Year 1 exploration program at the Bornite Project. Early in December 2017, South32 committed to fund the $10 million 2018 program for the Bornite Project. The funds, which represent the second tranche, maintain the Option Agreement in good standing, and were fully received on January 24, 2018. An additional $0.80 million was received during the year ended November 30, 2018 from South32 as an advance on the year three funding.

On January 31, 2019, we announced the 2019 program and budgets with South32 committing to fund the $9.2 million budget for the Bornite Project. The funds, which represent the third and final tranche, maintain the Option Agreement in good standing, and were fully received during the quarter.

Subscription Funding Phase

At any time during the option funding phase of the agreement, South32 may elect to subscribe for a 50% interest in a newly formed LLC which will take transfer of, and hold, Trilogy Metals US’ Alaskan Assets. As part of the Subscription Price, South32 will match any spending expended by us at the Arctic Project over 3 years (2017, 2018 and 2019), to a cumulative maximum of $16 million. Depending on when the option is exercised, certain amounts of the Initial Funding will be deducted from the Subscription Price.

Trilogy currently estimates that the Subscription Price would fund the UKMP through feasibility and the permitting of the first mine to be developed in the Ambler mining district. Once the full amount of the subscription payment of approximately $150 million is expended, the parties will contribute funding pro rata, as contemplated by the operating agreement which will govern the LLC (the “LLC Agreement”). The LLC Agreement anticipates a General Manager, Chief Financial Officer and Chief Operating and Technical Officer to be appointed by the LLC’s Board, which will have equal representation from Trilogy and South32.

As the initial option payments are credited against the future subscription price upon exercise, we have accounted for the payment received as deferred consideration. At such time as the option is exercised, the initial payments received to that date will be recognized as part of the consideration received for our contribution of the Alaska assets, including the UKMP, into the joint venture. If South 32 withdraws from the Option Agreement, the consideration will be recognized in the statement of loss at that time.

Summary of results

For the three months ended February 28, 2019, Trilogy reported a net loss of $4.3 million (or $0.03 basic and diluted loss per common share) which was higher than the net loss of $2.9 million for the corresponding period in 2018 (or $0.03 basic and diluted loss per common share). The first quarter 2019 differences, when compared to the first quarter 2018 are mostly due to factors discussed below:

During the three months ended February 28, 2018, the Company sold 1,360,000 (2017 – 410,000) common shares of Goldmining Inc. (“GMI”) for proceeds of $1.4 million and recorded a loss on held for trading investments of $0.14 million. There are no comparable figures for the period ended February 28, 2019 as the remaining investment in GMI was fully disposed of during fiscal 2018.

Other differences noted for the comparable period were i) an increase in general and administrative expenses of $0.15 million consisting mostly of $0.04 million in travel costs related to conference attendance and $0.11 million in stock exchange and regulatory fees; ii) an increase of $0.4 million in mineral properties expense mostly consisting of geochemistry work during the first quarter 2019 related to the Arctic Corescan project, waste water system design costs and set up costs incurred for the new warehouse in Fairbanks; iii) a decrease in professional fees as the comparative period included legal and accounting fees for the base shelf prospectus for which there are no comparable figures for the first quarter 2019; iv) an increase in salaries due to new hires during the second half of fiscal 2018; v) an increase in stock-based compensation due to a higher share price contributing to an overall greater fair value for options granted during the first quarter 2019; and vi) a quarter of the December 5, 2018 stock option grant fully vested at the grant date, which further contributed to the increase in stock-based compensation when compared to the first quarter 2018.

Selected financial data

Factors that can cause fluctuations in our quarterly results include the length of the exploration field season at the properties, the type of program conducted, stock option vesting, and issuance of shares. Other factors that have caused fluctuations in the quarterly results that would not be expected to re-occur include the acquisition and disposition of GMI shares and financing activities.

Our loss for the first quarter ended February 28, 2018 of $2.9 million is significantly lower compared to prior quarterly periods due to the timing of the field season. The drilling season encompassed the second quarter through to the fourth quarter, as reflected in the higher mineral properties expense for the prior quarters.

Our loss for the second quarter ended May 31, 2018 of $3.7 million is significantly higher than the comparable period due to a significant increase in the size of our field program resulting in increased mineral property expenses of $1.2 million.

Similarly, our loss for the third quarter ended August 31, 2018 of $9.9 million is slightly higher than the comparable loss of $9.0 million in the third quarter ended August 31, 2017 due to the size of the 2018 field program which added an additional $0.6 million in mineral properties expenses. The remaining $0.3 million difference is mostly due to increased general and administrative expenses, salaries and stock-based compensation.

During the fourth quarter of 2018, we had a loss of $5.3 million compared to a loss of $6.7 million in the fourth quarter of 2017. The primary drivers for the difference were $0.9 million lower mineral properties expenses, loss on disposition of investments of $0.8 million in the fourth quarter of 2017 for which the comparative is nil in the fourth quarter 2018, all offset by $0.5 million in increased salaries benefits in the fourth quarter 2018. We incurred $3.8 million of mineral property expenses in the fourth quarter of 2018 compared to $4.7 million of mineral property expenses in the fourth quarter of 2017 as the camp closed earlier in the 2018 program (October 13, 2018) versus the 2017 program (October 31, 2017).

Our loss for the first quarter ended February 28, 2019 of $4.3 million has decreased compared to the two prior quarterly periods and reflects the seasonality of the mineral property expenses which are mostly incurred during the summer and fall season.

Liquidity and capital resources

At February 28, 2019, we had $30.0 million in cash and cash equivalents and working capital of $29.8 million. The increase in cash and working capital was a result of fully receiving the $9.2 million Year 3 funding from South32 as well as an additional $1.0 million for the regional exploration program discussed above.

We expended $3.2 million on operating activities during the three months ended February 28, 2019 compared with $4.3 million for operating activities for the same period in 2018. Most cash spent on operating activities during all periods was expended on mineral property expenses, general and administrative, salaries and professional fees.

The Company continues to fund its cash expenditures through its working capital and funding from South32. The Company will need to raise additional funds to support its operations and administration expenses in the future. Future sources of liquidity may include debt financing, equity financing, convertible debt, exercise of options, or other means. The continued operations of the Company are dependent on its ability to obtain additional financing or to generate future cash flows.

All cash generated from investing activities during the three months ended February 28, 2019 were from the South 32 Option Agreement funding of $10.2 million (2018 - $9.6 million). During the three months ended February 28, 2019, no cash was generated from the sale of investments (2018 - $1.4 million) as all GMI shares were fully disposed as at August 31, 2018.

Contractual obligations

Contractual obligated undiscounted cash flow requirements as at February 28, 2019 are as follows.

Off-balance sheet arrangements

We have no material off-balance sheet arrangements. The Company has lease commitments for office and warehouse spaces with a remaining total commitment of $1.2 million.

Outstanding share data

At April 8, 2019, we had 132,073,798 common shares issued and outstanding. At April 8, 2019, we had outstanding 6,521,740 warrants with an exercise price of $1.52 each, 11,188,100 stock options with a weighted-average exercise price of $0.95, 1,192,852 deferred share units (“DSUs”), and 212,501 RSUs. Upon exercise of all the foregoing convertible securities, the Company would be required to issue aggregate of 19,117,182 common shares.

New accounting pronouncements

Certain recent accounting pronouncements have been included under note 2 in our February 28, 2019 unaudited interim consolidated financial statements

Critical accounting estimates

The most critical accounting estimates upon which our financial status depends are those requiring estimates of the recoverability of our capitalized mineral properties, impairment of long-lived assets, accounting for business combinations, income taxes and valuation of stock-based compensation.

Mineral properties and development costs

All direct costs related to the acquisition of mineral property interests are capitalized. The acquisition of title to mineral properties is a complicated and uncertain process. The Company has taken steps, in accordance with industry standards, to verify the title to mineral properties in which it has an interest. Although the Company has made efforts to ensure that legal title to its mining assets is properly recorded, there can be no assurance that such title will be secured indefinitely.

Impairment of long-lived assets

Management assesses the possibility of impairment in the carrying value of its long-lived assets whenever events or circumstances indicate that the carrying amounts of the asset or asset group may not be recoverable. Significant judgments are made in assessing the possibility of impairment. Management considers several factors in considering if an indicator of impairment has occurred, including but not limited to, indications of value from external sources, significant changes in the legal, business or regulatory environment, and adverse changes in the use of physical condition of the asset. These factors are subjective and require consideration at each period end. If an indicator of impairment is determined to exist, management calculates the estimated undiscounted future net cash flows relating to the asset or asset group using estimated future prices, mineral resources, and operating, capital and reclamation costs. When the carrying value of an asset exceeds the related undiscounted cash flows, the asset is written down to its estimated fair value, which is usually determined using discounted future cash flows. Management’s estimates of mineral prices, mineral resources, foreign exchange rates, production levels and operating capital and reclamation costs are subject to risk and uncertainties that may affect the determination of the recoverability of the long-lived asset.

Income taxes

We must make estimates and judgments in determining the provision for income tax expense, deferred tax assets and liabilities, and liabilities for unrecognized tax benefits including interest and penalties. We are subject to income tax law in the United States and Canada. The evaluation of tax liabilities involving uncertainties in the application of complex tax regulation is based on factors such as changes in facts or circumstances, changes in tax law, new audit activity, and effectively settled issues. The evaluation of an uncertain tax position requires significant judgment, and a change in such recognition would result in an additional charge to the income tax expense and liability.

Stock-based compensation

Compensation expense for options granted to employees, directors and certain service providers is determined based on estimated fair values of the options at the time of grant using the Black-Scholes option pricing model, which takes into account, as of the grant date, the fair market value of the shares, expected volatility, expected life, expected forfeiture rate, expected dividend yield and the risk-free interest rate over the expected life of the option. The use of the Black-Scholes option pricing model requires input estimation of the expected life of the option, volatility, and forfeiture rate which can have a significant impact on the valuation model, and resulting expense recorded.

South32 Option Agreement

The option to form the JV LLC is recognized as a financial instrument at inception of the arrangement with an initial fair value of $nil. This option is required to be re-measured at fair value at each reporting date with any changes in fair value recorded in loss for the period.