Second Quarter Report 2018 Management s Discussion & Analysis

Transcription

1 Second Quarter Report 2018 Management s Discussion & Analysis For the Three and Six Months Ended June 30, 2018 and 2017

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3 MANAGEMENT S DISCUSSION AND ANALYSIS This Management s Discussion and Analysis ( MD&A ) for Imperial Metals Corporation ( Imperial, the Company, we, us or our ) should be read in conjunction with the unaudited Condensed Consolidated Interim Financial Statements for the three and six months ended June 30, 2018 including the notes thereto ( Interim Financial Statements ), as well as the audited Consolidated Financial Statements and Management s Discussion and Analysis for the year ended December 31, This MD&A contains statements that may be considered forward looking information, and therefore investors are directed to review section Forward Looking Statements and Risks Notice within this MD&A. The Interim Financial Statements and comparative information have been prepared in accordance with International Financial Reporting Standards ( IFRS ), including International Accounting Standard 34, Interim Financial Reporting. The reporting currency of the Company is the Canadian ( CDN ) Dollar. Imperial is a Canadian mining company active in the acquisition, exploration, development, mining and production of base and precious metals. The Company, through its subsidiaries, owns the Red Chris, Mount Polley and Huckleberry copper mines in British Columbia. Imperial also holds a 50% interest in the Ruddock Creek lead/zinc property in British Columbia. Imperial has interests in various other early stage exploration properties, however exploration is currently focused at existing mining operations. The Company also continues to evaluate potential acquisitions. Imperial s principal business registered and records office address is Suite 200, 580 Hornby Street, Vancouver, British Columbia V6C 3B6 Canada. The Company was incorporated under the British Columbia Company Act, which was superseded by the British Columbia Business Corporations Act, on December 6, 2001 under the name IMI Imperial Metals Inc. Imperial changed its name to Imperial Metals Corporation on April 10, The Company is listed on The Toronto Stock Exchange and its shares trade under symbol III. As at August 13, 2018, the Company had 120,782,585 common shares outstanding, and on a diluted basis 137,500,897 common shares outstanding. Additional Company disclosure can be obtained from imperialmetals.com or sedar.com. SIGNIFICANT EVENTS AND LIQUIDITY The Company s Interim Financial Statements have been prepared on a going concern basis which assumes the Company will continue operating in the foreseeable future and will be able to realize its assets and discharge its liabilities in the normal course as they come due. Cash balances on hand, the projected cash flow from the Red Chris and Mount Polley mines, as well as the available credit facilities are expected to be sufficient to fund the working capital deficiency and the Company s obligations as they come due assuming the Company is able to successfully extend or refinance the Senior Credit Facility and the Second Lien Credit Facility prior to their maturity in the fourth quarter of 2018 and the Senior Unsecured Notes which mature in the first quarter of In addition, there are inherent risks related to the operation of the Company s mines which could require additional sources of financing. There can be no assurance that the Company will be able to successfully extend or renegotiate this debt, and that adequate additional financing will be available on terms acceptable to the Company or at all, which creates a material uncertainty that could have an adverse impact on the Company s financial condition and results of operations and may cast significant doubt on the Company s ability to continue as a going concern. On April 28, 2017 the acquisition of Huckleberry Mines Ltd. ( Huckleberry ) closed with Huckleberry becoming a wholly owned subsidiary of the Company. Huckleberry exercised its right of first refusal to purchase for cancellation all the shares of Huckleberry held by a syndicate of Japanese companies in exchange for cash consideration of $2.0 million. On May 30, 2017, the Company completed the sale of the Sterling gold mine property and related assets. During the latter half of 2017 the Company completed a number of transactions to improve liquidity. These included a rights offering for net proceeds of approximately $42.3 million, a private placement for gross proceeds of $5.0 million, amendment of the financial covenants and extension of maturities for both the Senior Credit Facility and Second Lien Credit Facility to October 1, 2018 and December 1, 2018, respectively, and entered into a $26.0 million bridge loan financing ( Bridge Loan ). On January 5, 2018, the Company issued 2,353,274 common shares in payment of $6.2 million of interest due on December 31, 2017 for certain debt facilities. On April 4, 2018, the Company issued 816,414 common shares in payment of $1.8 million of interest due on March 31, 2018 for the Junior Credit Facility. Imperial Metals Corporation Second Quarter Report June 30, 2018 MD&A # 1

4 On July 9, 2018, the Company issued 3,107,425 common shares in payment of $6.1 million of interest due on June 30, 2018 for the Junior Credit Facility and Convertible Debentures. Board of Director Changes On behalf of the Board of Directors, the Company is pleased to announce the appointments of Janine North and J.P. Veitch as independent non executive directors, elected on May 22, 2018 at the annual general meeting. Laurie Pare retired after not standing for re election at the Annual General Meeting on May 22, Members of the Board are indebted to Mr. Pare for his five years of dedicated service to the Company, and wish him well in his future endeavours. Executive Changes Randall Thompson has been appointed Vice President Operations. Randall has a history with Imperial, working for Huckleberry Mines Ltd., as Vice President Operations and General Manger, and later as President. He has a strong history in underground mine operations, and will work to advance development of the Martel zone at Mount Polley and the deep resource at Red Chris. Gordon Keevil resigned as Vice President Corporate Development effective May The Company wishes to extend its gratitude to Mr. Keevil for his nine years of service to Imperial. Mr. Keevil will continue to provide assistance to the Company on an as needed basis. ACCOUNTING POLICIES AND BASIS OF PRESENTATION The Company s significant accounting policies are presented in the audited consolidated financial statements for the year ended December 31, The following outlines the new accounting policies adopted by the Company effective January 1, 2018 and those new standards and interpretations not yet adopted by the Company. ADOPTION OF NEW ACCOUNTING STANDARDS The Company applies, for the first time, IFRS 15, Revenue from Contracts with Customers and IFRS 9, Financial Instruments that require restatement of previous financial statements. As required by IAS 34, the nature and effect of these changes are disclosed below. IFRS 15, Revenue from Contracts with Customers IFRS 15 supersedes IAS 11 Construction Contracts, IAS 18 Revenue and related Interpretations and it applies to all revenue arising from contracts with customers, unless those contracts are in the scope of other standards. Under IFRS 15, revenue is recognized at an amount that reflects the consideration to which an entity expects to be entitled in exchange for transferring goods or services to a customer. The new standard establishes a five step model to account for revenue arising from contracts with customers. The standard requires entities to exercise judgement, taking into consideration all of the relevant facts and circumstances when applying each step of the model to contracts with their customers. The five steps are to identify the contract(s) with the customer, identify the performance obligations in the contract, determine the transaction price, allocate the transaction price to each performance obligation and recognize revenue as each performance obligation is satisfied. IFRS 15 also requires enhanced disclosures about revenue to help users better understand the nature, amount, timing and uncertainty of revenue and cash flows from contracts with customers. The Company adopted IFRS 15 using the full retrospective method of adoption. The Company has concluded that revenue from the sale of concentrate should be recognized at the point in time when control of the concentrate passes to the customer which generally occurs when title transfers to the customer and on the date of shipment. Based on management s analysis, the timing and amount of our revenue from product sales did not change under IFRS 15. Imperial Metals Corporation Second Quarter Report June 30, 2018 MD&A # 2

5 IFRS 9, Financial Instruments IFRS 9, Financial Instruments ( IFRS 9 ) replaced IAS 39 Financial Instruments: Recognition and Measurement ( IAS 39 ). IFRS 9 uses a single approach to determine whether a financial asset is measured at amortized cost or fair value, replacing the multiple rules in IAS 39. The approach in IFRS 9 is based on how an entity manages its financial instruments in the context of its business model and the contractual cash flow characteristics of the financial assets. Most of the requirements in IAS 39 for classification and measurement of financial liabilities were carried forward unchanged to IFRS 9, except that an entity choosing to measure a financial liability at fair value will present the portion of any change in its fair value due to changes in the entity s own credit risk in other comprehensive income, rather than within profit or loss. The new standard also requires a single impairment method to be used, replacing the multiple impairment methods in IAS 39. We have assessed the classification and measurement of our financial assets and financial liabilities under IFRS 9 and concluded that the adoption of IFRS 9 did not affect the current classification of Company s financial assets and financial liabilities. The Company has determined that the new measurement requirements under IFRS 9 have impact on the certain financial liabilities (debt) held by the Company as a result of modification to those debt instruments. Under IFRS 9, when the contractual cash flows of a financial liability are renegotiated or otherwise modified and the renegotiation or modification does not result in the de recognition of that financial liability, the Company recalculates the gross carrying amount of the financial liability and recognizes a modification gain or loss in the statement of income (loss). Previously, under IAS 39, the Company did not recognize a gain or loss at the date of modification of a financial liability. Based on management s detailed review and analysis the effect of adopting of IFRS 9 had trivial effect on the opening retained earnings as at January 1, Amendments to IFRS 2 Classification and Measurement of Share based Payment Transaction The IASB issued amendments to IFRS 2 Share based Payment that address three main areas: the effects of vesting conditions on the measurement of a cash settled share based payment transaction; the classification of a share based payment transaction with net settlement features for withholding tax obligations; and accounting where a modification to the terms and conditions of a share based payment transaction changes its classification from cash settled to equity settled. On adoption, entities are required to apply the amendments without restating prior periods, but retrospective application is permitted if elected for all three amendments and other criteria are met. The Company has no share based payment transactions with net settlement features for withholding tax obligations and therefore, these amendments do not have any impact on the Company s consolidated financial statements. Accounting Standards Issued But Not Yet Adopted IFRS 16, Leases In January 2016, the IASB issued IFRS 16 Leases ( IFRS 16 ) which replaces IAS 17 Leases and its associated interpretative guidance. IFRS 16 applies a control model to the identification of leases, distinguishing between a lease and a service contract on the basis of whether the customer controls the asset being leased. For those assets determined to meet the definition of a lease, IFRS 16 introduces significant changes to the accounting by lessees, introducing a single, on balance sheet accounting model that is similar to current finance lease accounting, with limited exceptions for short term leases or leases of low value assets. Lessor accounting remains similar to current accounting practice. The standard is effective for annual periods beginning on or after January 1, 2019, with early application permitted for entities that apply IFRS 15. The Company is currently evaluating the impact the standard will have on its consolidated financial statements. QUARTER HIGHLIGHTS FINANCIAL In the December 2018 quarter the Company finalized the accounting for the April 2017 acquisition of the remaining 50% of Huckleberry Mines Ltd. that it did not own. IFRS 3 requires that any amounts resulting from the finalization of the accounting for the acquisition to be retroactively updated to the period in which the acquisition took place. The Company has therefore revised the items impacted by the finalization of the gain on bargain purchase of Huckleberry and the gain on revaluation of the 50% interest in Huckleberry in the comparative June 2017, September 2017 and December 2017 periods. All amounts related to this revision have been reflected in this MD&A. For further information on Huckleberry and the accounting for Imperial Metals Corporation Second Quarter Report June 30, 2018 MD&A # 3

6 the gains, refer to Note 5 of the audited consolidated financial statements for the year ended December 31, 2017 and Note 5 of the Interim Financial Statements for the three and six months ending June 30, Revenues decreased to $80.1 million in the June 2018 quarter compared to $106.7 million in the 2017 comparative quarter, a decrease of $26.6 million or 24.9%. Revenue from the Red Chris mine in the June 2018 quarter was $57.3 million compared to $62.3 million in the 2017 comparative quarter. This decrease was attributable to a lower quantity of copper concentrate sold partially offset by higher copper prices. Revenue from the Mount Polley mine in the June 2018 quarter was $22.8 million compared to $44.1 million in the 2017 comparative quarter. The strike by unionized employees that commenced in May 2018 resulted in lower production and restricted the ability of the Company to record revenue during the June 2018 quarter. In the June 2018 quarter, there were 2.6 concentrate shipments from Red Chris mine ( concentrate shipments) and 0.7 concentrate shipments from Mount Polley mine ( concentrate shipments). Variations in revenue are impacted by the timing and quantity of concentrate shipments, metal prices and exchange rates, and period end revaluations of revenue attributed to concentrate shipments where copper and gold prices will settle at a future date. The London Metals Exchange cash settlement copper price per pound averaged US$3.12 in the June 2018 quarter compared to US$2.57 in the 2017 comparative quarter. The London Metals Exchange cash settlement gold price per troy ounce averaged US$1,306 in the June 2018 quarter compared to US$1,257 in the June 2017 quarter. The average CDN/US$ Dollar exchange rate was in the June 2018 quarter, 4% lower than the exchange rate of in the June 2017 quarter. In CDN dollar terms the average copper price in the June 2018 quarter was CDN$4.03 per pound compared to CDN$3.46 per pound in the 2017 comparative quarter and the average gold price in the June 2018 quarter was CDN$1,686 per ounce compared to CDN$1,691 per ounce in the 2017 comparative quarter. Revenue in the June 2018 quarter decreased by $6.9 million due to a negative revenue revaluation as compared to a $0.5 million negative revenue revaluation in the 2017 comparative quarter. Revenue revaluations are the result of the copper price on the settlement date and/or the current period balance sheet date being higher or lower than when the revenue was initially recorded or the copper price at the last balance sheet date. Net loss for the June 2018 quarter was $36.6 million ($0.31 per share) compared to net income of $99.5 million ($1.06 per share) in the 2017 comparative quarter. The decrease in net income of $136.1 million was primarily due to the following factors: Income/loss from mine operations went from a loss of $5.9 million in June 2017 to a loss of $15.4 million in June 2018, a decrease in net income of $9.5 million. Interest expense went from $18.3 million in June 2017 to $19.3 million in June 2018, a decrease in net income of $1.0 million. Foreign exchange gains/losses on current and non current debt went from a gain of $12.4 million in June 2017 to a loss of $9.2 million in June 2018, a decrease in net income of $21.6 million. Gain of $109.8 million in the June 2017 quarter was recognized relating to the purchase of the additional 50% share in Huckleberry and revaluation of equity investment. No such gain recognized in June The Company s equity income in Huckleberry went from $1.0 million in June 2017 to $nil in June 2018, a decrease in net income of $1.0 million. Idle mine costs went from $1.4 million in June 2017 to $1.6 million in June 2018, a decrease in net income of $0.2 million. Tax position went from a recovery of $3.5 million in June 2017 to $12.2 million in June 2018, an increase in net income of $8.7 million. The June 2018 quarter net loss included foreign exchange loss related to changes in CDN/US Dollar exchange rate of $9.6 million compared to foreign exchange gain of $12.4 million in the 2017 comparative quarter. The $9.6 million foreign exchange loss is comprised of an $8.9 million loss on the senior notes, a $0.2 million loss on long term equipment loans, and a $0.5 million loss on operational items. The average CDN/US Dollar exchange rate in the June 2018 quarter was compared to an average of in the 2017 comparative quarter. Imperial Metals Corporation Second Quarter Report June 30, 2018 MD&A # 4

7 Cash flow was negative $2.6 million in the June 2018 quarter compared to positive cash flow of $12.3 million in the 2017 comparative quarter. Cash flow is a measure used by the Company to evaluate its performance, however, it is not a term recognized under IFRS. The Company believes Cash flow is useful to investors and it is one of the measures used by management to assess the financial performance of the Company. Capital expenditures were $15.8 million in the June 2018 quarter, down from $28.8 million in the 2017 comparative quarter. The June 2018 expenditures included $8.5 million for tailings dam construction, $5.4 million on mobile equipment and $1.9 million for other capital items. At June 30, 2018, the Company has not hedged any copper, gold or CDN/US Dollar exchange. Quarterly revenues will fluctuate depending on copper and gold prices, the CDN/US Dollar exchange rate, and the timing of concentrate sales, which is dependent on concentrate production and the availability and scheduling of transportation. OPERATIONS Red Chris Mine Metal production for the June 2018 quarter was million pounds copper and 8,614 ounces gold, down 25% and up 40% respectively from the 2017 comparative quarter. The mill achieved an average throughput of 27,802 tonnes per calendar day during the June 2018 quarter. Throughput was impacted by the failure of a trunnion bearing in the ball mill, resulting in about six days of mill downtime in May. Metal recoveries were 72.96% copper and 43.94% gold, a decrease of about 4% and an increase of about 16% respectively from the comparable 2017 quarter. Gold grades and recovery were better than expected during the quarter, while copper recovery continues to lag expectations with the majority of the ore fed to the mill coming from the upper benches of the phase 4 pushback of the Main zone. Red Chris Production Three Months Ended June 30 Six Months Ended June Ore milled tonnes 2,529,951 2,703,363 5,120,442 5,106,864 Ore milled per calendar day tonnes 27,802 29,707 28,290 28,215 Grade % copper Grade g/t gold Recovery % copper Recovery % gold Copper 000 s pounds 11,510 15,423 31,235 31,751 Gold ounces 8,614 6,159 20,829 11,971 Silver ounces 19,388 26,875 54,270 54,827 Red Chris recently acquired a PC7000 electric excavator, which is currently being commissioned. A review by Golder Associates of the potential for utilizing block cave methods to mine the deep mineralization, recommended five geotechnical holes, one of which has been completed. The remainder of the geotechnical holes are being deferred to a later date as their locations are not impacted by this year s mining operations. The completed hole (RC18 588) was drilled using orientated core diamond drilling to gather geotechnical information regarding the proposed block cave mine also intersected significant copper and gold mineralization below the East zone pit. The drill hole was designed to test an area where the proposed block cave infrastructure may be constructed and more rock quality information was needed. Preliminary results indicate that the rock quality and strength in this area tested for development is very positive. Drill hole RC was collared from the ramp near the bottom of the current East zone pit. It was directed to the northeast at 65 to pass through the upper part of the planned block cave target and test the ground for geotechnical information down to the proposed production level. As expected, the hole intersected good chalcopyrite pyrite mineralization in leucodiorite at the start before crossing a projected fault at approximately 155 metres after which grade decreased. The intensity of quartz veins mineralized with chalcopyrite and minor bornite gradually improved at approximately 380 metres depth as the hole entered the northeastern part of the main block cave target. Continuous copper gold values were intersected to approximately 750 metres, except for minor post mineral dikes. The remainder of the hole went through a mixture of Stuhini Group country rocks and Red stock intrusives close to the northern margin of the stock, returning low to moderate grades. Imperial Metals Corporation Second Quarter Report June 30, 2018 MD&A # 5

8 Significant assay intervals tabulated below: Drill Hole # Total Length (m) Interval From (m) Interval To (m) Interval Length (m) Copper (%) Gold (g/t) RC , including including Jim Miller Tait, P.Geo., the designated Qualified Person as defined by National Instrument , has reviewed and approved this disclosure relating to drill hole RC A full QA/QC program using blanks, standards and duplicates was maintained for all samples submitted to the Red Chris laboratory where the core samples were analyzed. Exploration, development and capital expenditures were $12.1 million in the June 2018 quarter compared to $18.7 million in the comparative 2017 quarter. Mount Polley Mine Metals production was impacted by the employee union strike initiated May 23. Processing operations continued at a lower rate with staff operating the mill, but mining operations were suspended and only low grade stockpiles have been processed. As a result, grades for the 2018 second quarter were lower with copper at 0.182% and gold at g/t compared to 0.212% copper and g/t gold during the comparable 2017 quarter. Metal production was 3.82 million pounds copper and 9,110 ounces gold, a decrease of 31.8% and 34.7% respectively from the 5.61 million pounds copper and 13,958 ounces gold produced in the June 2017 quarter. Mill throughput averaged 17,395 tonnes per calendar day, down about 11% from the comparable 2017 quarter. The average throughput during the month of June was 14,957 tonnes per day. Mount Polley Production Three Months Ended June 30 Six Months Ended June Ore milled tonnes 1,582,944 1,779,403 3,195,430 3,472,164 Ore milled per calendar day tonnes 17,395 19,554 17,654 19,183 Grade % copper Grade g/t gold Recovery % copper Recovery % gold Copper 000 s pounds 3,819 5,606 9,191 11,067 Gold ounces 9,110 13,958 21,390 27,769 Silver ounces 7,531 10,537 16,497 21,414 Exploration, development and capital expenditures were $3.4 million in the June 2018 quarter compared to $3.1 million in the comparative 2017 quarter. The collective agreement with the unionized workforce at the Mount Polley mine expired on December 31, Since late 2017 the Company had been in the process of negotiating a new contract. On May 7, 2018 the Company served the Union with 72 hour lockout notice and on May 23, 2018, the unionized employees went on strike. On August 2, 2018 the union ratified the new collective agreement and employees have been recalled to their normal shifts. Huckleberry Mine Huckleberry continues to be on care and maintenance. For the quarter ending June 30, 2018, Huckleberry incurred idle mine costs comprised of $1.3 million in operating costs and $0.3 million in depreciation expense. Imperial Metals Corporation Second Quarter Report June 30, 2018 MD&A # 6

9 EARNINGS AND CASH FLOW Select Quarter Financial Information expressed in thousands, except share and per share amounts Three Months Ended June 30 Six Months Ended June Total revenues $80,066 $106,741 $197,978 $222,490 Net income (loss) $(36,555) $99,544 $(52,721) $80,792 Net income (loss) per share $(0.31) $1.06 $(0.45) $0.86 Diluted income (loss) per share $(0.31) $1.06 $(0.45) $0.86 Adjusted net loss (1) $(27,823) $(21,780) $(32,577) $(44,076) Adjusted net loss per share (1) $(0.24) $(0.23) $(0.28) $(0.47) Adjusted EBITDA (1) $(2,180) $12,851 $34,212 $28,039 Working capital deficiency $(791,538) $(910,645) $(791,538) $(910,645) Total assets $1,661,947 $1,661,258 $1,661,947 $1,661,258 Total debt (including current portion) $856,802 $849,917 $856,802 $849,917 Cash flow (1)(2) $(2,593) $12,341 $33,365 $27,406 Cash flow per share (1)(2) $(0.02) $0.13 $0.28 $0.29 (1) Refer to table under heading Non IFRS Financial Measures for further details. (2) Cash flow is defined as the cash flow from operations before the net change in non cash working capital balances, income and mining taxes, and interest paid. Cash flow per share is defined as cash flow divided by the weighted average number of common shares outstanding during the year. Select Items Affecting Net Income (Loss) (presented on an after tax basis) expressed in thousands Three Months Ended June 30 Six Months Ended June Net income (loss) before undernoted items $(13,043) $(10,298) $(3,937) $(17,374) Interest expense (14,450) (13,518) (28,315) (26,955) Foreign exchange gain (loss) on debt (9,237) 12,430 (20,644) 15,780 Gain on bargain purchase of Huckleberry and revaluation of equity investment in Huckleberry 109, ,818 Gain on sale of Sterling Share of income (loss) in Huckleberry 1,032 (557) Net income (loss) $(36,555) $99,544 $(52,721) $80,792 NON IFRS FINANCIAL MEASURES The Company reports four non IFRS financial measures: Adjusted net income, adjusted EBITDA, cash flow and cash cost per pound of copper produced which are described in detail below. The Company believes these measures are useful to investors because they are included in the measures that are used by management in assessing the financial performance of the Company. Adjusted net income, adjusted EBITDA, and cash flow are not generally accepted earnings measures and should not be considered as an alternative to net income (loss) and cash flows as determined in accordance with IFRS. As there is no standardized method of calculating these measures, these measures may not be directly comparable to similarly titled measures used by other companies. Reconciliations are provided below. Adjusted Net Loss and Adjusted Net Loss Per Share Adjusted net loss in the June 2018 quarter was $27.8 million ($0.24 per share) compared to an adjusted net loss of $21.8 million ($0.23 per share) in the 2017 comparative quarter. Adjusted net loss reflects the financial results excluding the effect of items not settling in the current period and non recurring items. Adjusted net loss is calculated by removing the gains or losses, resulting from mark to market revaluation of derivative instruments, net of tax, unrealized foreign exchange gains or losses on non current debt, net of tax and other adjustments as further detailed in the following table. Imperial Metals Corporation Second Quarter Report June 30, 2018 MD&A # 7

10 Calculation of Adjusted Net Income (Loss) expressed in thousands, except share and per share amounts Three Months Ended June 30 Six Months Ended June Net income (loss) reported $(36,555) $99,544 $(52,721) $80,792 Unrealized foreign exchange (gain) loss on non current debt, net of tax (a) 8,907 (11,426) 20,318 (14,970) Gain on bargain purchase of Huckleberry and revaluation of equity investment in Huckleberry (b) (109,818) (109,818) Gain on sale of Sterling (b) (175) (80) (175) (80) Adjusted net loss $(27,823) $(21,780) $(32,578) $(44,076) Basic weighted average number of common shares outstanding 117,648,245 93,586, ,203,671 93,586,710 Adjusted net loss per share $(0.24) $(0.23) $(0.28) $(0.47) (a) (b) Non current debt is recorded on the Company s Statement of Financial Position at the foreign exchange rate in effect on that date, with changes in foreign exchange rates, net of taxes, flowing through net income. The amounts of non current debt ultimately payable may be materially different than reflected in the financial statements due to foreign currency movements. Tax recoveries on unrealized capital losses are recorded only to the extent that they are expected to be realized by offset against available capital gains. There are no tax effects related to this transaction. Adjusted EBITDA Adjusted EBITDA in the June 2018 quarter was a loss of $2.2 million compared to income of $12.9 million in the 2017 comparative quarter. We define Adjusted EBITDA as net income (loss) before interest expense, taxes, depletion and depreciation, and as adjusted for certain other items described in the reconciliation table below. Adjusted EBITDA is not necessarily comparable to similarly titled measures used by other companies. We believe that the presentation of Adjusted EBITDA is appropriate to provide additional information to investors about certain non cash or unusual items that we do not expect to continue at the same level in the future, or other items that we do not believe to be reflective of our ongoing operating performance. We further believe that our presentation of this non IFRS financial measure provides information that is useful to investors because it is an important indicator of our operations and the performance of our core business. Adjusted EBITDA is not a measurement of operating performance or liquidity under IFRS and should not be considered as a substitute for earnings from operations, net income or cash generated by operating activities computed in accordance with IFRS. Adjusted EBITDA has limitations as an analytical tool and therefore Adjusted EBITDA should not be considered as a measure of discretionary cash available to us to invest in the growth of our business. Imperial Metals Corporation Second Quarter Report June 30, 2018 MD&A # 8

11 A reconciliation of net loss to Adjusted EBITDA is as follows: expressed in thousands Three Months Ended June 30 Six Months Ended June Net income (loss) $(36,555) $99,544 $(52,721) $80,792 Adjustments: Income and mining tax recovery (12,231) (3,520) (12,265) (8,515) Interest expense 19,271 18,268 38,263 36,426 Depletion and depreciation 16,766 20,905 38,423 42,591 Accretion of future site reclamation provisions , Share based compensation Foreign exchange (gain) loss 9,553 (12,509) 21,344 (15,640) Revaluation (gain) losses on marketable securities 215 (81) (624) (71) Share of (income) loss from Huckleberry (1,032) 557 Gain on bargain purchase of Huckleberry and revaluation of equity investment in Huckleberry (109,818) (109,818) Gain on sale of Sterling (175) (80) (175) (80) Other (13) 275 (13) 275 Adjusted EBITDA $(2,180) $12,851 $34,212 $28,039 Cash Flow and Cash Flow Per Share Cash flow in the June 2018 quarter was negative $2.6 million compared to positive $12.3 million in the 2017 comparative quarter. Cash flow per share was $(0.02) in the June 2018 quarter compared to $0.13 in the 2017 comparative quarter. Cash flow and cash flow per share are measures used by the Company to evaluate its performance however they are not terms recognized under IFRS. Cash flow is defined as cash flow from operations before the net change in non cash working capital balances, income and mining taxes, and interest paid and cash flow per share is the same measure divided by the weighted average number of common shares outstanding during the year. expressed in thousands, except per share and per share amounts Three Months Ended June 30 Six Months Ended June Income (Loss) before taxes $(48,786) $96,024 $(64,986) $72,277 Items not affecting cash flows Equity (income) loss in Huckleberry (1,032) 557 Depletion and depreciation 16,766 20,905 38,423 42,591 Share based compensation Accretion of future site reclamation provisions , Unrealized foreign exchange (gain) loss 9,140 (12,744) 20,497 (15,998) Interest expense 19,271 18,268 38,263 36,426 Gain on bargain purchase of Huckleberry and revaluation of equity investment in Huckleberry (109,818) (109,818) Gain on sale of Sterling (175) (80) (175) (80) Other 202 (81) (637) (71) Cash flow $(2,593) $12,341 $33,365 $27,406 Basic weighted average number of common shares outstanding 117,648,245 93,586, ,203,671 93,586,710 Cash flow per share $(0.02) $0.13 $0.28 $0.29 Imperial Metals Corporation Second Quarter Report June 30, 2018 MD&A # 9

12 Cash Cost Per Pound of Copper Produced The cash cost per pound of copper produced is a non IFRS financial measure that does not have a standardized meaning under IFRS, and as a result may not be comparable to similar measures presented by other companies. Management uses this non IFRS financial measure to monitor operating costs and profitability. The Company is primarily a copper producer and therefore calculates this non IFRS financial measure individually for its three copper mines, Red Chris, Mount Polley and Huckleberry, and on a composite basis for these mines. The cash cost per pound of copper produced is derived from the sum of cash production costs, transportation and offsite costs, treatment and refining costs, royalties, net of by product and other revenues, divided by the number of pounds of copper produced during the period. Cash costs of production include direct labour, operating materials and supplies, equipment and mill costs, and applicable overhead. Off site costs include transportation, warehousing, marketing, related insurance and treatment and refining costs for smelting and refining concentrate. Treatment and refining costs applicable to the concentrate produced during the period are calculated in accordance with the contracts the Company has with its customers. By product and other revenues represent (i) revenue calculated based on average metal prices for by products produced during the period based on contained metal in the concentrate; and (ii) other revenues as recorded during the period. Cost of sales, as reported on the consolidated statement of comprehensive income, includes depletion and depreciation and share based compensation, non cash items. The resulting cash costs are different than the cost of production because of changes in inventory levels and therefore inventory and related transportation and offsite costs are adjusted from a cost of sales basis to a production basis. The cash costs for copper produced are converted to US$ using the average US$ to CDN$ exchange rate for the period divided by the pounds of copper produced to obtain the cash cost per pound of copper produced in US$. Variations from period to period in the cash cost per pound of copper produced are the result of many factors including: grade, metal recoveries, amount of stripping charged to operations, mine and mill operating conditions, labour and other cost inputs, transportation and warehousing costs, treatment and refining costs, the amount of by product and other revenues, the US$ to CDN$ exchange rate and the amount of copper produced. Idle mine costs during the periods when the Huckleberry mine was not in operation have been excluded from the cash cost per pound of copper produced. Imperial Metals Corporation Second Quarter Report June 30, 2018 MD&A # 10

13 The following tables reconcile cost of sales as shown on the consolidated statement of comprehensive income to the cash cost per pound of copper produced in US$ for the three months ended June 30, 2018 and Cash Cost Per Pound of Copper Produced expressed in thousands, except cash cost per pound of copper produced Three Months Ended June 30, 2018 Total per Red Mount Sterling & Financial Chris Polley Corporate Statements Composite A B C=A+B Cost of sales $72,405 $23,093 $ $95,498 $95,498 Less: Depletion and depreciation (12,051) (4,382) (16,433) (16,433) Share based compensation (14) (29) (43) (43) Cash costs before adjustment to production basis 60,340 18,682 $ $79,022 79,022 Adjust for inventory change (3,053) 1,717 (1,336) Adjust transportation and offsite costs (470) (244) (714) Treatment, refining and royalty costs 3,611 1,114 4,725 By product and other revenues (13,797) (15,121) (28,918) Cash cost of copper produced in CDN$ $46,631 $6,148 $52,779 US$ to CDN$ exchange rate Cash cost of copper produced in US$ $36,120 $4,762 $40,882 Copper produced pounds 11,510 3,819 15,329 Cash cost per lb copper produced in US$ $3.14 $1.25 $2.67 Three Months Ended June 30, 2017 Total per Red Mount Sterling & Financial Chris Polley Corporate Statements Composite A B C=A+B Cost of sales $69,267 $42,954 $371 $112,592 $112,221 Less: Depletion and depreciation (12,366) (8,014) (56) (20,436) (20,380) Share based compensation (94) (7) (101) (101) Cash costs before adjustment to production basis 56,807 34,933 $315 $92,055 91,740 Adjust for inventory change (6,083) (2,170) (8,253) Adjust transportation and offsite costs (694) 438 (256) Treatment, refining and royalty costs 7,235 2,352 9,587 By product and other revenues (9,689) (22,429) (32,118) Cash cost of copper produced in CDN$ $47,576 $13,124 $60,700 US$ to CDN$ exchange rate Cash cost of copper produced in US$ $35,372 $9,758 $45,130 Copper produced pounds 15,423 5,606 21,029 Cash cost per lb copper produced in US$ $2.29 $1.74 $2.15 Imperial Metals Corporation Second Quarter Report June 30, 2018 MD&A # 11

14 The following tables reconcile cost of sales as shown on the consolidated statement of comprehensive income to the cash cost per pound of copper produced in US$ for the six months ended June 30, 2018 and Cash Cost Per Pound of Copper Produced expressed in thousands, except cash cost per pound of copper produced Six Months Ended June 30, 2018 Total per Red Mount Sterling & Financial Chris Polley Corporate Statements Composite A B C=A+B Cost of sales $136,064 $59,776 $ $195,840 $195,840 Less: Depletion and depreciation (25,042) (12,657) (37,699) (37,699) Share based compensation (36) (57) (93) (93) Cash costs before adjustment to production basis 110,986 47,062 $ $158, ,048 Adjust for inventory change 2,779 1,370 4,149 Adjust transportation and offsite costs (379) (169) (548) Treatment, refining and royalty costs 9,706 2,575 12,281 By product and other revenues (33,100) (35,249) (68,349) Cash cost of copper produced in CDN$ $89,992 $15,589 $105,581 US$ to CDN$ exchange rate Cash cost of copper produced in US$ $70,416 $12,198 $82,614 Copper produced pounds 31,235 9,191 40,426 Cash cost per lb copper produced in US$ $2.25 $1.33 $2.04 Six Months Ended June 30, 2017 Total per Red Mount Sterling & Financial Chris Polley Corporate Statements Composite A B C=A+B Cost of sales $128,299 $104,854 $936 $234,089 $233,153 Less: Depletion and depreciation (22,799) (19,141) (150) (42,090) (41,940) Share based compensation (162) (12) (174) (174) Cash costs before adjustment to production basis 105,338 85,701 $786 $191, ,039 Adjust for inventory change 80 (17,670) (17,590) Adjust transportation and offsite costs (520) (670) (1,190) Treatment, refining and royalty costs 13,597 4,496 18,093 By product and other revenues (18,407) (44,377) (62,784) Cash cost of copper produced in CDN$ $100,088 $27,480 $127,568 US$ to CDN$ exchange rate Cash cost of copper produced in US$ $75,028 $20,600 $95,628 Copper produced pounds 31,751 11,067 42,818 Cash cost per lb copper produced in US$ $2.36 $1.86 $2.23 Imperial Metals Corporation Second Quarter Report June 30, 2018 MD&A # 12

15 RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 2018 COMPARED TO THE THREE MONTHS ENDED JUNE 30, 2017 Overview Revenues decreased to $80.1 million in the June 2018 quarter compared to $106.7 million in the 2017 comparative quarter. Variations in revenue are impacted by the timing and quantity of concentrate shipments, metal prices and exchange rates, and period end revaluations of revenue attributed to concentrate shipments where copper and gold prices will settle at a future date. The Company had a loss from mine operations of $15.4 million in the June 2018 quarter compared to a loss of $5.9 million in the 2017 comparative quarter. Net loss for the June 2018 quarter was $36.6 million ($0.31 per share) compared to a net income of $99.5 million ($1.06 per share) in the 2017 comparative quarter. Revenue expressed in thousands of dollars, except quantity amounts Three Months Ended June Revenue before revaluation $86,998 $107,228 Revenue revaluation (6,932) (487) $80,066 $106,741 expressed in thousands of dollars, except quantity amounts Three Months Ended June 30, 2018 Red Chris Mine Mount Polley Mine Sterling Mine Total Sales Copper 000 s pounds 12,842 3,359 16,201 Gold ounces 9,522 8,214 17,736 Silver ounces 20,969 7,030 27,999 Revenue Copper $42,682 $11,018 $ $53,700 Gold 14,744 11,610 26,354 Silver (151) ,275 22,790 80,065 Corporate 1 Total Revenue $57,275 $22,790 $ $80,066 expressed in thousands of dollars, except quantity amounts Three Months Ended June 30, 2017 Red Chris Mount Polley Sterling Mine Mine Mine Total Sales Copper 000 s pounds 16,863 6,222 23,085 Gold ounces 6,707 15, ,677 Silver ounces 31,702 11,936 43,638 Revenue Copper $50,840 $18,503 $ $69,343 Gold 11,089 25, ,611 Silver ,292 44, ,734 Corporate 7 Total Revenue $62,292 $44,118 $324 $106,741 Imperial Metals Corporation Second Quarter Report June 30, 2018 MD&A # 13

16 During the June 2018 quarter, the Company sold 16.2 million pounds copper and 17,736 ounces gold compared to 23.1 million pounds copper and 22,677 ounces gold in the 2017 comparative quarter. During the June 2018 quarter there were 2.6 concentrate shipments from Red Chris mine ( concentrate shipments) and 0.7 concentrate shipments from Mount Polley mine ( concentrate shipments). During the June 2018 quarter, the Company s revenue was derived primarily from the sale of copper and gold in concentrate from the Red Chris and Mount Polley mines. The Red Chris mine accounted for 71.5% and Mount Polley mine accounted for 28.5% of the Company s revenue in the period. Copper accounted for 67.1% and gold accounted for 32.9% of the Company s revenue in the period. Cost of Sales expressed in thousands of dollars Three Months Ended June Operating expenses $63,032 $67,430 Salaries, wages and benefits 15,990 24,625 Depletion and depreciation 16,433 20,436 Share based compensation $95,498 $112,592 Cost of sales for the June 2018 quarter were $95.5 million compared to $112.6 million for the comparative quarter in 2017, due to the following major factors: Red Chris mine operating expenses and salaries, wages and benefits for 2018 were $60.3 million compared to $57.5 million in the comparative 2017 quarter; Mount Polley mine operating expenses and salaries, wages and benefits for 2018 were $18.8 million compared to $35.1 million in the comparative 2017 quarter; depletion and depreciation for the Red Chris and Mount Polley mines was $16.4 million compared to $20.0 million in the comparative 2017 quarter; included in cost of sales for 2018 are inventory impairment charges of $1.7 million compared to $1.6 million in the comparative 2017 quarter. General and Administration Costs expressed in thousands of dollars Three Months Ended June Administration $1,173 $962 Share based compensation corporate Depreciation corporate assets Foreign exchange loss 316 (77) $1,676 $1,129 General and administration costs were $1.7 million in the June 2018 quarter compared to $1.1 million in the 2017 comparative quarter. Administration costs increased due to higher staffing costs while share based compensation costs decreased due to a lower number of options outstanding which still had vesting remaining. The average CDN/US Dollar exchange rate for the June 2018 quarter was compared to in the 2017 comparative quarter. Foreign exchange gains are attributable to holding US Dollar denominated cash, accounts receivable, and accounts payable. These net US Dollar asset and liability balances are primarily the result of the activities at the Red Chris and Mount Polley mines. Imperial Metals Corporation Second Quarter Report June 30, 2018 MD&A # 14

17 Interest Expense expressed in thousands of dollars Three Months Ended June Interest on non current debt $17,348 $16,771 Other interest 1,923 1,497 $19,271 $18,268 Interest expense increased to $19.3 million in the June 2018 quarter from $18.3 million in the 2017 comparative quarter. The interest expense increased primarily as a result of the following: interest expense on non current debt increased from $16.8 million in the June 2017 quarter to $17.3 million in the June 2018 quarter, an increase of $0.5 million related primarily to higher rates paid on the Senior Credit Facility. Other interest expense increased from $1.5 million in 2017 to $1.9 million in 2018, an increase of $0.4 million. This increase was primarily due to the additional interest expense on other obligations in 2018 compared to Higher interest rates on certain debt during the 2018 quarter compared to the comparative 2017 quarter, resulted in higher interest expense. Interest expense is determined by a variety of factors including levels of non current debt, levels of short term debt on concentrate advances, the interest rate on the debt and foreign exchange rates on interest incurred on US denominated debt. Other Finance Income (Expense) expressed in thousands of dollars Three Months Ended June Accretion of future site reclamation provisions $(791) $(586) Foreign exchange gain (loss) on debt (9,237) 12,430 Fair value adjustment to marketable securities (215) 81 (10,243) 11,925 Interest income Other finance income (expense) $(10,192) $11,972 Other finance expense totaled $10.2 million in the June 2018 quarter compared to income of $12.0 million in the 2017 comparative quarter. The expense resulted primarily from the foreign exchange discussed below. At June 30, 2018, the Company had US Dollar denominated debt of US$330.3 million compared to US$328.4 million at December 31, Foreign exchange gains and losses attributable to US denominated short and non current debt reflect the foreign currency movement during the three months ended June 30, 2018 and resulted in an $8.9 million loss on the senior notes and $0.3 million loss on equipment loans. Imperial Metals Corporation Second Quarter Report June 30, 2018 MD&A # 15

18 RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 2018 COMPARED TO THE SIX MONTHS ENDED JUNE 30, 2017 Overview Revenues decreased to $198.0 million in the June 2018 period compared to $222.5 million in the 2017 comparative period. Variations in revenue are impacted by the timing and quantity of concentrate shipments, metal prices and exchange rates, and period end revaluations of revenue attributed to concentrate shipments where copper and gold prices will settle at a future date. The Company had income from mine operations of $2.1 million in the June 2018 period compared to a loss of $11.6 million in the 2017 comparative period. Net loss for the June 2018 period was $52.7 million ($0.45 per share) compared to a net income of $80.8 million ($0.86 per share) in the 2017 comparative period. Revenue expressed in thousands of dollars, except quantity amounts Six Months Ended June Revenue before revaluation $210,494 $217,879 Revenue revaluation (12,516) 4,611 $197,978 $222,490 expressed in thousands of dollars, except quantity amounts Six Months Ended June 30, 2018 Red Chris Mine Mount Polley Mine Sterling Mine Total Sales Copper 000 s pounds 31,992 8,569 40,561 Gold ounces 20,999 19,986 40,985 Silver ounces 55,645 15,582 71,227 Revenue Copper $106,156 $27,697 $ $133,853 Gold 32,964 30,952 63,916 Silver ,160 58, ,977 Corporate 1 Total Revenue $139,160 $58,817 $ $197,978 expressed in thousands of dollars, except quantity amounts Six Months Ended June 30, 2017 Red Chris Mine Mount Polley Mine Sterling Mine Total Sales Copper 000 s pounds 31,874 14,926 46,800 Gold ounces 11,671 36, ,372 Silver ounces 57,758 29,357 87,115 Revenue Copper $98,004 $46,281 $ $144,285 Gold 18,509 58, ,085 Silver , , ,346 Corporate 144 Total Revenue $116,858 $105,146 $342 $222,490 Imperial Metals Corporation Second Quarter Report June 30, 2018 MD&A # 16