Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
General
We were incorporated under the laws of British Columbia, Canada in 1984. In 2004, we
changed our corporate jurisdiction from a British Columbia company to a Canadian corporation. In December 2011, we
amended our articles to change our name from “i-minerals inc.” to “I-Minerals Inc.”
The Company is engaged in the exploration, evaluation and development of our
Helmer-Bovill industrial minerals property (the “Helmer-Bovill Property”). The Helmer-Bovill Property, in which we
hold a 100% interest, is comprised of 11 mineral leases totaling 5,140.64 acres located approximately 6 miles northwest
of Bovill, Latah County, Idaho. Since inception, the Company has been in the exploration stage but moved into the
development stage in fiscal 2018. In fiscal 2019, the Company reverted back to the evaluation stage.
We acquired the Helmer-Bovill Property from Idaho Industrial Minerals (“IIM”) pursuant
to an Assignment Agreement with Contingent Right of Reverter (the “IIM Agreement”) dated August 12, 2002, as amended
August 10, 2005, August 10, 2008 and January 21, 2010, between I-Minerals USA (formerly Alchemy Kaolin Corporation), our
wholly owned subsidiary, and IIM. Under the terms of the IIM Agreement, we issued a total of 1,800,000 common
shares to IIM.
Our principal executive office is located at Suite 880, 580 Hornby Street, Vancouver,
British Columbia, Canada and our telephone number is (877) 303-6573. Our operations office is located at 13403 N.
Government Way, #102, Hayden, Idaho.
To date, we have not earned significant revenues from the operation of our Helmer-Bovill
Property. Accordingly, we are dependent on debt and equity financing as our primary source of operating working
capital. Our capital resources are largely determined by the strength of the junior resource markets and by the
status of our projects in relation to these markets, and its ability to compete for investor support of its
projects.
Our Principal Projects
Our activities at the Helmer-Bovill Property are focused on developing the Bovill Kaolin
Project and the WBL Tailings Project.
The Bovill Kaolin Project
Our lead project, the Bovill Kaolin Project, is a strategically located long term
resource of quartz, potassium feldspar (“K-spar”), halloysite and kaolinite formed through weathering of a border phase
of the Idaho Batholith causing all minerals to be contained within a fine white clay-sand mixture referred to as
“primary clay.” The Bovill Kaolin Project is located within 3 miles of state highways with electricity and natural gas
already at the property boundary.
Since 2010, our exploration work has focused diamond drilling on the Bovill Kaolin
Project. To date, a total of 322 diamond drill holes have been drilled totaling 35,909 feet. As a result of
these drill campaigns, four deposits have been identified: Kelly’s Hump, Kelly’s Hump South, Middle Ridge and WBL.
In June 2014, we completed an updated pre-feasibility study on the Bovill Kaolin Project
(the “2014 PFS”) and on March 8, 2016, we announced the economic results of our initial feasibility study (the “2016
FS”). However, based on the results of an updated independent market study it is apparent that fundamental changes
in the businesses that consume our minerals has taken place over the past several years. These changes include
offshoring and reformulation wherein industries that had previously used K-spar for example have reformulated their
production batches using alternate minerals. Markets do exist for all of the minerals contained within the Bovill
Kaolin Project but not in the volumes contemplated in the 2016 FS. Accordingly, the 2016 FS is considered not to
be current and should not be relied upon and previously disclosed proven and probable reserve estimates for the Bovill
Kaolin Project should no longer be classified or relied upon as such.
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Although the reserves and subsequent financial analyses disclosed in the 2016 FS are no
longer current, the mineral resources stated in the 2016 FS remain current and have recently been re-stated in a
standalone technical report prepared by SRK Consulting (U.S.) recently completed an updated resource estimate. The
updated mineral resource statement from this report contains the same tonnages and grades as were disclosed in the 2016
FS and is summarized below.
In addition, the Company engaged Millcreek Engineering of Salt Lake City, Utah to
estimate the capital and operating costs for a smaller plant capable of producing up to 20,000 tons of metakaolin and
10,000 tons of halloysite per year. The estimated Operating Costs and Capital Cost fell in line with expectations
and the Company has retained Millcreek to complete a Pre-Feasibility Study of a metakaolin and halloysite
operation. It is envisioned that the sand fraction (K-spar and quartz) will be screened and sold into lower value
industrial applications.
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Updated Measured and Indicated Resource Estimate
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Measured Resources of 5.7 million tons containing 76.5% quartz/K-spar sand, 12.3% Kaolinite and 4.0%
Halloysite.
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Indicated Resources of 15.5 million tons containing 57.0% quartz/K-spar sand, 15.5% Kaolinite and 2.8%
Halloysite.
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667,000 tons of contained halloysite, 3,119,000 tons of contained kaolinite and 13,235,000 tons of contained
quartz/K-spar.
In May 2017, the Idaho Department of Lands (“IDL”) accepted our operation and
reclamation plan. We have since re-engaged with the IDL to discuss changes to the operation and reclamation plan
given the reduced impacts of the smaller operation.
Plan of Operation
During the next twelve months, our plan of operation is to complete a Prefeasibility
study (“PFS”) being undertaken by Millcreek Engineering (“Millcreek”) and assuming the results of the PFS are
satisfactory, move to a full Feasibility Study (“FS”). In May 2017, the IDL accepted our Operation and Reclamation
Plan on the Bovill Kaolin Project. We have advised the IDL we will be amending our Operation and Reclamation plan
to reflect the smaller operation. We have received initial power demand estimates from Millcreek and will discuss
our power needs with Avista, the local utility, to see if the electricity grid requires upgrading as was required for
the larger of our mineral operation. In the interim we will continue to strengthen our customer list and continue
discussions to raise the capital to fund the mine construction.
Outlook
Our focus continues to be the detailed assessment of all of our mineral assets and
advancing the Bovill Kaolin Project towards production. The Company has elected to initially focus on the
development of a metakaolin and halloysite operation. After receiving operating cost and capital cost estimates
from Millcreek Engineering it has engaged Millcreek to complete a PFS. The envisaged plant would produce 10,000
tons of halloysite and 20,000 tons of metakaolin annually. Mine Development Associates of Reno (“MDA”) have been
engaged to amend the mine plan to target the more clay rich (kaolin and halloysite) sections of the deposit.
Preliminary results from MDA indicate focusing mining efforts on the more weathered material material will materially
increase the halloysite and kaolinite grade. Completion of the prefeasibility study is expected in the first
calendar quarter of 2020.
With respect to work at GMT, a bulk sample of approximately 60 tons of primary clay
material has been processed. Changes to the process flow sheet as compared with prior GMT pilot plants included
the installation of a hammer mill at the front end of the circuit and the incorporation of a new hydrocyclone processing
step to improve clay/sand separation. Pilot scale hydrocyclone test work resulted in the clay yields increasing to
about 30% as compared with a yield of 22% as demonstrated in previous pilot plant work. Successful implementation
of the hydrocyclone processing has resulted in increased production of ULTRA HallopureÒ and HalloPureÒ halloysite
products and kaolin for metakaolin production beyond the rates achieved in pilot plant work associated with the
feasibility study. With the pilot plant completed, the kaolin has been calcined into a metakaolin product.
Small portions of the halloysite have been successfully beneficiated into value added products for testing in air and
gas filtration applications. Results from the current pilot plant will be incorporated into the ongoing PFS by
Millcreek.
Concrete test results using our fine ground metakaolin have been received from CTL |
Thomson. Excellent strength numbers were generated while staying within the ASTM C-618 water demand
requirements. This batch of metakaolin being tested was produced using flash calcination technologies.
Management believes a highly reactive metakaolin would be an attractive pozzolan in the Pacific Northwest as pozzolans
with comparable characteristics are too expensive for use in many cement applications.
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At present we have inventory of all minerals for distribution to customers.
Sample requests for halloysite have come from North America, Europe, the Middle East,
South America and Asia showing both the scarcity of halloysite in general and the quality of I-Minerals halloysite in
particular. While we currently have inventory of ULTRA HallopureÒ and HalloPureÒ several companies have advanced
their halloysite consuming products to near commercialization and have indicated a need for multiple tons of halloysite
to complete the commercialization process.
Results of Operation
Six months ended October 31, 2019
We recorded a loss of $2,624,163 ($0.03 per share) for the six months ended October 31,
2019 as compared to a loss of $1,618,478 ($0.02 per share) for the six months ended October 31, 2018. The increase
in the loss recorded for the period ended October 31, 2019 as compared to the period ended October 31, 2018 is the net
result of changes to a number of expenses. Of note are the following items:
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Management and consulting fees of $101,513 (2018 - $98,294) are comprised of fees to manage our Company and
stock-based compensation. The stock-based compensation recognized in the current period was $888 (2018 -
$5,865). Approximately 75% of the fees to manage our Company are charged to management and consulting fees and the
other 25% is charged to mineral property expenditures.
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Mineral property expenditures of $724,205 (2018 - $115,530) are costs incurred on our Helmer-Bovill
Property. The expenses increased this period compared to the 2018 period as we are now expensing all mineral
property expenditures while in the 2018 period, we capitalized $460,770 of development costs. The main components
of costs during the current period included engineering and consulting ($288,263) and metallurgy ($215,727).
During the current period, the Company continued mineral product optimization and work on the Prefeasibility Study.
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General and miscellaneous expenses of $136,811 (2018 - $294,203) are comprised of office and telephone expenses,
payroll taxes, medical benefits, insurance premiums, travel expenses, promotional expenses, shareholder communication
fees, transfer agent fees and filing fees. The decrease during the current period was due to a reduction in
shareholder communications fees and severance costs.
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Professional fees of $111,398 (2018 – $102,756) include legal fees, audit fees and financial consulting fees.
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Accretion expense of $60,348 (2018 - $130,580) is the amortization of the fair value of bonus shares and bonus
warrants issued to the lender of the promissory notes. The bonus shares and bonus warrants are amortized over the
life of the promissory notes.
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Interest expense of $1,488,711 (2018 - $1,110,060) is from promissory notes that bear interest at the rates of
12%-14% per year. Interest increased as additional funds were advanced.
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We recorded a gain on change in fair value of derivative liabilities of $3,143 (2018 – gain of $235,443).
The change in fair value of derivative liabilities is based on the change in remaining term of derivative instruments
and our stock price. The derivatives include warrants as well as stock options granted to non-employees. The
derivative liabilities do not represent cash liabilities. During Q3 fiscal 2019, the derivative warrants expired
unexercised.
Liquidity and Capital Resources
Our aggregate operating, investing and financing activities during the six months ended
October 31, 2019 resulted in a net cash outflow of $207,615 (2018 – inflow of $27,672). As at October 31, 2019, we
had a working capital deficiency of $26,479,308.
During the six months ended October 31, 2019, $2,562,765 was used in operations before
changes in non-cash operating working capital items (2018 - $1,719,634). During the six months ended October 31,
2019, we spent $7,611 on investing activities (2018 - $515,347) and we received $680,000 from financing activities (2018
- $1,161,084).
We have been financed by advances pursuant to promissory notes advanced by BV Lending
LLC, an entity controlled by Allen L. Ball, a member of our Board of Directors and our largest shareholder (the
“Lender”). During the six months ended October 31, 2019, the Company was receiving advances pursuant to the Fifth
Promissory Notes. As at October 31, 2019, the principal balance of the promissory notes was $24,784,305.
On October 25, 2019, the Company entered into a loan agreement with the Lender pursuant
to which up to $700,000 will be advanced to the Company in tranches (the “Sixth Promissory Notes”). Subsequent to
October 31, 2019, the Company received advances of $500,000. An additional $200,000 of advances are available
under the Sixth Promissory Notes.
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The Third Promissory Notes, the Fifth Promissory Notes and the Sixth Promissory Notes
have a maturity date of the earlier of (i) June 30, 2020 and (ii) 60 days after a pre-feasibility study has been filed
on SEDAR.
We have not as yet put into commercial production any mineral properties and as such
have no operating revenues. Accordingly, we are dependent on debt and equity financing as the primary source of
operating working capital. Our capital resources are largely determined by the strength of the junior resource
markets and by the status of our projects in relation to these markets, and our ability to compete for investor support
of our projects.
We remain dependent on additional financing to fund development requirements on the
Helmer-Bovill property and for general corporate costs. With respect to funds required for capital cost items,
State-sponsored debt financing instruments may be available on attractive terms, and we intend to pursue such financial
instruments to cover portions of the capital costs associated with placing the Bovill Kaolin deposits into
production.
We do not have the ability to internally generate sufficient cash flows to support our
operations for the next twelve months. We have been receiving funds from a company controlled by a director of the
Company through promissory notes. We have no formal plan in place to address this going concern issue but consider
that we will be able to obtain additional funds by equity financing and/or debt financing; however, there is no
assurance of additional funding being available. As a result, our auditors included an emphasis of matter note in
their report on the financial statements for the year ended April 30, 2019 about our ability to continue as a going
concern.
Off-Balance Sheet Arrangements
We have no significant off-balance sheet arrangements that have or are reasonably likely
to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses,
results of operations, liquidity, capital expenditures or capital resources that is material to shareholders.
Critical Accounting Policies
Measurement Uncertainty
The preparation of these consolidated financial statements in conformity with US GAAP
requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure
of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of
revenues and expenses during the reporting period. We regularly evaluate estimates and assumptions related to the
useful life and recoverability of long lived assets, stock-based compensation, valuation of convertible debentures and
derivative liabilities, and deferred income tax asset valuation allowances. We base our estimates and assumptions
on current facts, historical experience and various other factors that it believes to be reasonable under the
circumstances, the results of which form the basis for making judgments about the carrying values of assets and
liabilities and the accrual of costs and expenses that are not readily apparent from other sources. The actual
results experienced by us may differ materially and adversely from our estimates. To the extent there are material
differences between the estimates and the actual results, future results of operations will be affected. The most
significant estimates with regard to our condensed consolidated financial statements relate to the determination of fair
values of derivative liabilities and stock-based transactions.
Stock-based Compensation
We account for all stock-based payments and awards under the fair value based
method. Stock-based payments to non-employees are measured at the fair value of the consideration received, or the
fair value of the equity instruments issued, or liabilities incurred, whichever is more reliably measurable.
The fair value of stock-based payments to non-employees is periodically re-measured
until the counterparty performance is complete, and any change therein is recognized over the vesting period of the
award and in the same manner as if we had paid cash instead of paying with or using equity based instruments. The
cost of the stock-based payments to non-employees that are fully vested and non-forfeitable as at the grant date is
measured and recognized at that date, unless there is a contractual term for services in which case such compensation
would be amortized over the contractual term.
We account for the granting of stock options to employees using the fair value method
whereby all awards to employees will be recorded at fair value on the date of the grant. The fair value of all
stock options is expensed over their vesting period with a corresponding increase to additional paid-in capital.
Compensation costs for stock-based payments that do not include performance conditions
are recognized on a straight-line basis. Compensation cost associated with a share based award having a performance
condition is recognized on the probable outcome of that performance condition during the requisite service period. Share
based awards with a performance condition are accrued on an award by award basis.
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We use the Black-Scholes option valuation model to calculate the fair value of stock
options at the date of the grant. Option pricing models require the input of highly subjective assumptions, including
the expected price volatility. Changes in these assumptions can materially affect the fair value estimates.
Derivative Liabilities
We evaluate our financial instruments and other contracts to determine if those
contracts or embedded components of those contracts qualify as derivatives to be separately accounted for in accordance
with ASC 815. The result of this accounting treatment is that the fair value of the embedded derivative is
marked-to-market at each balance sheet date and recorded as a liability and the change in fair value is recorded in the
consolidated statement of loss. Upon conversion or exercise of a derivative instrument, the instrument is marked
to fair value at the conversion date and then that fair value is reclassified to equity.
The classification of derivative instruments, including whether such instruments should
be recorded as liabilities or as equity, is re-assessed at the end of each reporting period. Derivative
instruments that become subject to reclassification are reclassified at the fair value of the instrument on the
reclassification date. Derivative instrument liabilities are classified in the balance sheet as current as
settlement of the derivative instruments are at the option of the holder.
We use the Black-Scholes option valuation model to value derivative liabilities.
This model uses Level 3 inputs in the fair value hierarchy established by ASC 820 Fair Value Measurement.
Mineral Property Acquisition and Exploration Costs
Mineral property acquisition costs are capitalized when incurred. Acquisition
costs include cash consideration and the fair market value of shares issued on the acquisition of mineral property
claims.
Costs related to the development of our mineral reserves are capitalized when it has
been determined an ore body can be economically developed. The development stage begins when an ore body is
determined to be economically recoverable based on proven and probable reserves and appropriate permits are in place,
and ends when the production stage or exploitation of reserves begins. Major mine development expenditures are
capitalized, including primary development costs such as costs of building access ways, tailings impoundment,
development of water supply and infrastructure developments.
Exploration costs include those relating to activities carried out (a) in search of
previously unidentified mineral deposits, or (b) at undeveloped concessions. Pre-development activities involve
costs incurred in the exploration stage that may ultimately benefit production that are expensed due to the lack of
evidence of economic development, which is necessary to demonstrate future recoverability of these expenses.
Secondary development costs are incurred for preparation of an ore body for production in a specific ore block or work
area, providing a relatively short-lived benefit only to the mine area they relate to, and not to the ore body as a
whole.
Once production has commenced, capitalized costs will be depleted using the
units-of-production method over the estimated life of the proven and probable reserves. If mineral properties are
subsequently abandoned or impaired, any capitalized costs will be charged to the Consolidated Statements of Loss in that
period.
We assess the carrying cost of our mineral properties for impairment whenever
information or circumstances indicate the potential for impairment. Such evaluations compare estimated future net
cash flows with our carrying costs and future obligations on an undiscounted basis. If it is determined that the
future undiscounted cash flows are less than the carrying value of the property, a write down to the estimated fair
value is charged to the Consolidated Statements of Loss for the period. Where estimates of future net cash flows
are not available and where other conditions suggest impairment, management assesses if the carrying value can be
recovered.
For significant exploration and development projects, interest is capitalized as part of
the historical cost of developing and constructing assets in accordance with ASC 835-20. Interest is capitalized until
the asset is ready for service. Capitalized interest is determined by multiplying the Company’s weighted-average
borrowing cost on general debt by the average amount of qualifying costs incurred. Once an asset subject to interest
capitalization is completed and placed in service, the associated capitalized interest is expensed through depletion or
impairment.
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