Ivanhoe Electric Inc. (IE) FY 2023 MD&A
This page reproduces the company's own Item 7 MD&A text from the linked SEC filing. It is filer text, not grepcent analysis, scoring, or investment advice.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and the related notes to those statements included elsewhere in this Annual Report. In addition to historical financial information, the following discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. Our actual results and timing of selected events may differ materially from those anticipated in these forward-looking statements as a result of many factors, including those discussed under Item 1A. Risk Factors and elsewhere in this Annual Report. See “Cautionary Note Regarding Forward-Looking Statements.”
Business Overview
We are a United States domiciled company that combines advanced mineral exploration technologies with electric metals exploration projects predominantly located in the United States. We use our accurate and powerful Typhoon™ geophysical surveying system, together with advanced data analytics provided by our 94.3% owned subsidiary, Computational Geosciences Inc. (“CGI”), to accelerate and de-risk the mineral exploration process as we seek to discover new deposits of critical metals that may otherwise be undetectable by traditional exploration technologies. We believe the United States is significantly underexplored and has the potential to yield major new discoveries of critical metals. Our mineral exploration efforts focus on copper as well as other metals including nickel, vanadium, cobalt, platinum group elements, gold and silver. Through the advancement of our portfolio of electric metals exploration projects, headlined by the Santa Cruz Project in Arizona and the Tintic Project in Utah, as well as other exploration projects in the United States, we intend to support the United States' supply chain independence by finding and delivering critical metals necessary for the electrification of the economy. We also operate a 50/50 joint venture with Saudi Arabian Mining Company Ma’aden ("Ma'aden") to explore for minerals on ~48,500 km2 of underexplored Arabian Shield in Saudi Arabia.
Finally, in addition to our mineral projects, we also own a 90.0% controlling interest in VRB Energy Inc. ("VRB") which is primarily engaged in the design, manufacture, installation, and operation of vanadium redox flow energy storage systems.
At our Santa Cruz Project in Arizona, we are evaluating the potential for a high-grade modern underground copper mining operation. In September 2023, we completed the Initial Assessment & Technical Report Summary for the Santa Cruz Project (the "IA"), which outlines a potential 5.9 million tonnes per year underground mining operation, supported by 105.2 million tonnes of modeled mill feed with an average grade of 1.58% copper from the Santa Cruz and East Ridge Deposits, resulting in an estimated 20-year mine life. We are advancing further studies for an underground copper mining operation with a focus on minimizing the surface footprint of the mine while at the same time incorporating leading technologies to improve efficiencies and costs. We are designing a technologically advanced mine that we expect to result in low carbon dioxide emissions per pound of copper produced and be a leading example of responsibly produced domestic copper. Key considerations that will influence our decision making include, but are not limited to, using clean and renewable energy in our future mining operations, optimizing and minimizing our water utilization, minimizing our environmental footprint, ensuring workforce diversity and hiring from local communities, health, safety and environmental performance, support of local cultural heritage and biodiversity protection.
References to our mineral projects refers to our interests in such projects which may be a direct ownership interest in mineral titles (including through subsidiary entities), a right to acquire mineral titles through an earn-in or option agreement, or, in the case of our investments in publicly listed companies in Canada, through our ownership of the equity of those companies that have an interest in such mineral project.
Our shares of common stock are listed on the NYSE American and the TSX under the ticker symbol “IE”.
Reverse Stock Split
On June 16, 2022, we effected a reverse stock split of our outstanding common stock at a ratio of 3-for-1 (the “Reverse Stock Split”). The number of authorized shares and the par value of the common stock were not adjusted as a result of the Reverse Stock Split. All references to common stock, options to purchase common stock, per share data and related information have been retrospectively adjusted to reflect the effect of the Reverse Stock Split for all periods presented.
Business Developments in the Year
On May 15, 2023, we signed a Common Stock Subscription Agreement ("the Subscription Agreement") with Ma’aden. On July 6, 2023, we completed the closing of the transactions contemplated by the Subscription Agreement (the
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“Ma’aden Transactions”) and entered into an investor rights agreement, a shareholders’ agreement and the other instruments contemplated thereby.
The Ma'aden Transactions included the establishment of a 50/50 exploration joint venture between Ma’aden and Ivanhoe Electric to explore for minerals on ~48,500 km2 of underexplored Arabian Shield in Saudi Arabia, and a strategic investment by Ma'aden in Ivanhoe Electric common stock. On July 6, 2023, we issued to Ma’aden an aggregate of 10,269,604 shares of common stock of our Company, constituting 9.9% of the total outstanding number of shares of common stock immediately following closing of the Ma'aden Transactions, for gross proceeds of approximately $127.1 million, representing an aggregate purchase price of $12.38 per share. Of the $127.1 million total proceeds from the private placement, $66.0 million has been contributed to the joint venture to fund its exploration activities, including the purchase of three new-generation TyphoonTM machines from I-Pulse Inc. The remaining $61.1 million has been retained by Ivanhoe Electric to advance our portfolio of US mineral projects, and for working capital and general corporate purposes.
On July 10, 2023, we filed an automatic shelf registration statement on Form S-3 to permits us to publicly offer and sell securities from time to time, including common stock, preferred stock, debt securities, warrants, subscription rights and units. We may offer and sell securities under the Form S-3 from time to time.
On September 6, 2023, we completed and announced the IA. The IA is a preliminary technical and economic study for the Santa Cruz Project and associated high-grade mineral resources included in the Santa Cruz and East Ridge deposits. The study analyzes the potential for a high-grade underground copper mining operation supported by modern technologies to reduce environmental impact and powered predominantly by renewable energy.
On September 18, 2023, we closed an underwritten public offering consisting of 11,851,852 shares of our common stock at a public offering price of $13.50 per share. The aggregate gross proceeds to the Company from the offering were approximately $160 million, before deducting underwriting discounts and commissions and estimated offering expenses payable by the Company.
In addition, we received notice from the underwriters on September 18, 2023, of the full exercise of their option to purchase an additional 1,777,777 shares of common stock from the Company. The aggregate gross proceeds from the exercise of the underwriters’ option was approximately $24 million, before deducting underwriting discounts and commissions and estimated offering expenses payable by the Company. The sale of the underwriters’ option shares closed on September 21, 2023.
On October 23, 2023, we entered into a subscription agreement with Ma’aden whereby Ma’aden agreed to purchase 1,513,650 shares of our common stock at a purchase price of $13.50 per share in a private placement, for aggregate gross proceeds of approximately $20.4 million. The subscription agreement is as a result of the "top-up right” granted to Ma'aden under the July 6, 2023 investor rights agreement which enables Ma'aden to purchase additional shares of our common stock to maintain its 9.9% stock ownership position in the event of any issuances. The sale of the shares closed on October 31, 2023.
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Selected Financial Information
The selected financial information set forth below is presented in accordance with U.S. GAAP and is derived from our audited consolidated financial statements for the years ended December 31, 2023 and 2022. We did not declare or pay any dividends or distributions in any financial reporting period.
| (In thousands, except per share amounts) | Year Ended December 31, 2023 | Year Ended December 31, 2022 | ||||
|---|---|---|---|---|---|---|
| Revenue | $ | 3,903 | $ | 8,440 | ||
| Cost of sales | (2,986) | (3,135) | ||||
| Gross profit | 917 | 5,305 | ||||
| Expenses: | ||||||
| Exploration expenses | 126,719 | 105,286 | ||||
| General and administrative expenses | 48,204 | 26,971 | ||||
| Research and development expenses | 6,120 | 5,040 | ||||
| Net loss attributable to: | ||||||
| Common stockholders or parent | 199,377 | 149,813 | ||||
| Comprehensive loss attributable to: | ||||||
| Common stockholders or parent | 200,261 | 149,501 | ||||
| Basic and diluted loss per share attributable to common stockholders or parent | $ | 1.95 | $ | 1.91 | ||
| Total assets | 487,226 | 260,486 | ||||
| Total non-current liabilities | 71,223 | 40,606 |
Segments
We account for our business in three business segments – (i) critical metals, (ii) data processing and software licensing services and (iii) energy storage systems.
Significant Components of Results of Operations
Revenue, Cost of Sales and Gross Profit
We have not generated any revenue from our mining projects because they are in the exploration stage. We do not expect to generate any revenue from our mining projects for the foreseeable future.
We generate some revenue from our technology businesses CGI and VRB, which are included in the data processing and energy storage systems business segments, respectively.
CGI generates revenue comes from the sale of data processing services to the mining and oil and gas industries. In prior years, CGI has also generated revenue from software licensing.
VRB generates revenue from developing, manufacturing and selling vanadium redox flow energy storage systems.
Exploration Expenses
Exploration expenses include topographical, geological, geochemical and geophysical studies, exploratory drilling, trenching, sampling and activities in relation to identifying a mineral resource and then evaluating the technical feasibility and commercial viability of extracting the mineral resource, as well as value-added taxes in relation to these direct exploration and evaluation costs incurred in foreign jurisdictions where recoverability of those taxes is uncertain. Exploration expenses also include salaries, benefits and non-cash stock-based compensation expenses of the employees performing these activities.
Exploration expenses also include payments under earn-in and option agreements where the option right is with respect to ownership interests in legal entities owning the underlying mineral project in the exploration project phase. Through our earn-in and option agreements, we have the right (and in some cases, the obligation) to fund and conduct exploration on the underlying mineral project prior to determining whether to acquire a minority or majority ownership interest through further funding the costs of such exploration and, in some cases, through direct payments to the owners of the project. In the event we cease making expenditures on an exploration mineral project or fail to incur the agreed level of
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exploration expenditures, we will not obtain an ownership right beyond any which may have been acquired as of the date of termination.
Included in exploration expenses are exploration costs that we incur in relation to generating new projects. These activities may or may not proceed to earn-in agreements depending on our evaluation. These are categorized as “Project generation and other”.
General and Administrative Expenses
Our general and administrative expenses consist of salaries and benefits, stock-based compensation, professional and consultant fees, insurance and other general administration costs. Our general and administrative expenses have increased significantly now that we are operating as a public company and have added to our management team. In particular, we incurred increased general and administrative expenses costs in 2023 compared to 2022 for salaries, non-cash stock-based compensation, compliance related costs and directors’ and officers’ insurance expense.
Year Ended December 31, 2023 Compared to Year Ended December 31, 2022
For the year ended December 31, 2023 we recorded a net loss attributable to common stockholders of $199.4 million ($1.95 per share), compared to $149.8 million ($1.91 per share) for the year ended December 31, 2022, which was an increase of $49.6 million. Significant contributors to this increase in the year ended December 31, 2023 included an increase of $21.4 million in exploration expenditures, an increase of $21.2 million in general and administrative expenses, an increase of $32.2 million in share of loss of equity method investees, a decrease of $4.5 million in revenue compared to the year ended December 31, 2022 offset by a decrease of $19.0 million in non-cash loss on revaluation of convertible debt as compared to the year ended December 31, 2022.
Exploration expenses were $126.7 million for the year ended December 31, 2023 an increase of $21.4 million from $105.3 million for the year ended December 31, 2022. Exploration expenses consisted of the following:
| (In thousands) | Year Ended December 31, 2023 | Year Ended December 31, 2022 | ||||
|---|---|---|---|---|---|---|
| Exploration Expenses: | ||||||
| Santa Cruz, USA | $ | 57,203 | $ | 61,172 | ||
| San Matias, Colombia | 28,068 | 18,454 | ||||
| Tintic, USA | 13,131 | 2,282 | ||||
| Hog Heaven, USA | 7,812 | 2,216 | ||||
| Lincoln, USA | 3,684 | 1,312 | ||||
| White Hill, USA | 1,451 | — | ||||
| Carolina, USA | 1,337 | 1,307 | ||||
| Pinaya, Peru | 958 | 2,616 | ||||
| Project generation and other | 13,075 | 15,927 | ||||
| Total | $ | 126,719 | $ | 105,286 |
During the year ended December 31, 2023, expenditures largely focused on exploration activities at:
•the Santa Cruz Project where $57.2 million of exploration expenditure was incurred in the year ended December 31, 2023 compared to $61.2 million incurred in the year ended December 31, 2022. Activities during the year ended December 31, 2023, at Santa Cruz were focused on a program of exploration and infill resource, geotechnical, hydrological and metallurgical drilling, advancing technical studies, completing the updated mineral resource estimate released in February 2023 and the finalization of the IA and the National Instrument 43-101 Preliminary Assessment and Technical Report ("PEA") which were released on September 6, and September 11, 2023.
•the San Matias Project where $28.1 million of exploration expenditure was incurred by Cordoba in the year ended December 31, 2023 compared to $18.5 million in the year ended December 31, 2022. Activities during the year ended December 31, 2023, focused on continuing work on the National Instrument 43-101 feasibility study on the Alacran deposit which was completed in December 2023. Activities during the year ended December 31, 2023, included infill geotechnical, metallurgical, hydrological and infill resource drilling, feasibility metallurgical test work, infrastructure, mine, mill and tailings facility design work, investigation of power supply options, environmental studies and market investigations;
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•the Tintic Project where $13.1 million of exploration expenditure was incurred in the year ended December 31, 2023 compared to $2.3 million in the year ended December 31, 2022. Activities during the year ended December 31, 2023 at Tintic were focused on completing an initial diamond drill hole and commencing a two drill rig exploration program that is testing new areas of the historic Main Tintic Mining District. Drilling has focused on deep targets guided by geophysical data; and
•the Hog Heaven Project in Montana where $7.8 million of exploration expenditure was incurred in the year ended December 31, 2023 compared to $2.2 million in the year ended December 31, 2022. Activities during the year ended December 31, 2023 at Hog Heaven included a drilling program that commenced in June 2023. The ongoing drill program is designed to search for additional silver, gold, and copper-rich high-sulfidation epithermal mineralization, which was the focus of historical mining activities and is also intended to search for porphyry copper mineralization at depth. During 2023, we completed 12 drill holes, totaling 10,905 meters. In November 2023, we conducted a TyphoonTM geophysical survey covering approximately 10 km2 of land.
General and administrative expenses were $48.2 million for the year ended December 31, 2023, an increase of $21.2 million from $27.0 million in the year ended December 31, 2022. Several items contributed to the increase, including:
•a $15.0 million increase in non-cash stock-based compensation expense from $2.0 million for the year ended December 31, 2022 to $17.0 million for the year ended December 31, 2023 primarily due to Ivanhoe Electric stock option and RSU grants that have occurred from November 2022 onwards.
•a $1.9 million increase in directors and officers insurance expenses from $3.4 million for the year ended December 31, 2022 to $5.3 million for the year ended December 31, 2023 in relation to the director and officers insurance policy that we entered into when we became a public company in June 2022; and
•a $1.9 million increase in salary and wages from $2.0 million for the year ended December 31, 2022 to $4.7 million for the year ended December 31, 2023 due to adding more people to our management and administrative teams following our IPO in June 2022.
During the year ended December 31, 2023, we recorded $36.0 million share of loss of equity method investees which was an increase of $32.2 million from the $3.7 million share of loss of equity method investee recorded for the year ended December 31, 2022. The $36.0 million share of loss of equity method investees is largely attributable to our recognition of a $34.4 million loss from our 50% share of the loss from the Ma'aden joint venture due to the land access rights of $66.0 million being expensed in accordance with our accounting policy for exploration and evaluation costs.
During the year ended December 31, 2022, we recorded a non-cash $19.0 million loss on revaluation of convertible debt which related to the convertible notes that were automatically converted into shares of common stock upon the completion of our initial public offering on June 30, 2022. There was no similar expense in 2023.
Revenue for the year ended December 31, 2023 was $3.9 million, a decrease of $4.5 million from $8.4 million for the year ended December 31, 2022.
| Year Ended December 31, 2023 | Year Ended December 31, 2022 | Percentage changeyear-over-year | ||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| (In thousands) | ||||||||||
| CGI: Software licensing and data processing services: | ||||||||||
| Revenue | $ | 1,300 | $ | 7,729 | (83) | % | ||||
| Cost of sales | (497) | (577) | (14) | % | ||||||
| Gross profit | 803 | 7,152 | (89) | % | ||||||
| VRB: Energy storage systems: | ||||||||||
| Revenue | $ | 2,603 | $ | 711 | 266 | % | ||||
| Cost of sales | (2,489) | (2,558) | (3) | % | ||||||
| Gross profit (loss) | 114 | (1,847) | 106 | % | ||||||
| Total | ||||||||||
| Revenue | $ | 3,903 | $ | 8,440 | (54) | % | ||||
| Cost of sales | (2,986) | (3,135) | (5) | % | ||||||
| Gross profit | 917 | 5,305 | (83) | % |
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CGI’s software licensing and data processing services to the mining and oil and gas industries represented 33% of our revenue for the year ended December 31, 2023 ($1.3 million) and 92% for the year ended December 31, 2022 ($7.7 million). The decrease of $6.4 million in CGI’s revenue from 2023 to 2022 was a direct result of the year ended December 31, 2022 including revenue from a customer who licensed certain software from CGI for a one-time fee of $6.5 million. There were no similar agreements in 2023 and we cannot provide any assurance that CGI will enter into any similar contracts in the future.
CGI’s gross profit for the year ended December 31, 2023 was $0.8 million, a $6.3 million or 89% decrease from $7.2 million for the year ended December 31, 2022. The 2022 licensing of certain software for a one-time fee of $6.5 million had a direct impact on gross profit as the licenses had no underlying carrying value and therefore resulted in a $6.5 million gross profit being recognized for the year ended December 31, 2022.
VRB’s energy storage system revenue represented 67% of our revenue for the year ended December 31, 2023 ($2.6 million) and 8% for the year ended December 31, 2022 ($0.7 million). During the year ended December 31, 2023, VRB delivered, installed and commissioned energy storage systems of 2.18MW/6.25MWh to customers, which resulted in $2.6 million of revenue being recognized.
VRB’s gross profit for the year ended December 31, 2023 was $0.1 million, a $2.0 million or 106% increase from the $1.8 million gross loss for the year ended December 31, 2022. VRB’s gross loss for the year ended December 31, 2022 was largely due to an inventory impairment of $1.9 million being recognized in relation to the termination of a tolling agreement with a producer of ammonium metavanadate.
Research and development expenses for the year ended December 31, 2023 were $6.1 million, an increase of $1.1 million from the same period in 2022. The increase is primarily attributable to incurring $2.9 million of Typhoon related research and development activities for the year ended December 31, 2023 compared to $0.2 million for the year ended December 31, 2022. In 2023, we commenced design and development activities for our next generation of TyphoonTM equipment.
Stock-Based Compensation
During the year ended December 31, 2023, we granted stock options to certain employees of the Company. The fair value of the option grants was determined using the Black-Scholes option-pricing model as follows:
| February 1, 2023 Grant Date | March 1, 2023 Grant Date | July 1, 2023 Grant Date | August 9, 2023 Grant Date | December 1, 2023 Grant Date | |
|---|---|---|---|---|---|
| Number of options granted | 500,000 | 100,000 | 100,000 | 200,000 | 50,000 |
| Exercise price | $13.23 | $15.46 | $13.04 | $16.03 | $11.75 |
| Black-Scholes option-pricing model fair value | $7.22 | $8.53 | $6.95 | $8.46 | $5.96 |
In addition, in January 2023, we granted 750,000 RSUs to a new senior officer of the Company which had a fair value on the grant date of $12.15 per share.
Liquidity, Capital Resources and Capital Requirements
Cash Resources
We have recurring net losses and negative operating cash flows and we expect that we will continue to operate at a loss for the foreseeable future.
We generate revenue from our technology businesses. We have not generated any revenue from our mining projects and do not expect to generate any revenue from our mining projects for the foreseeable future.
We have funded our operations primarily through the sale of our equity and convertible securities.
At December 31, 2023, and 2022, we had cash and cash equivalents of $205.0 million and $139.7 million, respectively, and a working capital of $176.8 million and $133.6 million, respectively. Of the total cash and cash equivalents at December 31, 2023, and December 31, 2022, $15.0 million and $20.7 million, respectively, was not available for the general corporate purposes of the Company as these amounts were held by non-wholly-owned subsidiaries.
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As at February 26, 2024, we believe that we will have sufficient cash resources to carry out our business plans for at least the next 12 months, after which we expect to need additional financing to further advance our projects and conduct our business. We have based these estimates on our current assumptions which may require future adjustments based on our ongoing business decisions as well as, in particular, exploration success at our mineral projects. Accordingly, we may require additional cash resources earlier than we currently expect or we may need to curtail currently planned activities.
Our significant operational expenses include the payments that we anticipate making under the various earn-in and option agreements to which we are a party. These agreements are structured to provide us with flexibility whereby our ability to continue to explore on a mineral project is contingent on funding agreed specified levels over specified time intervals. See Item 1. Business — Mineral Project Obligations and Payments.
We may seek additional financing at any time through debt, equity, project specific debt, and/or other means. Our continued operations are dependent on our ability to obtain additional financing or to generate future cash flows. However, there can be no assurance that we will be successful in our efforts to raise additional capital on terms favorable to us, or at all.
Cash Balances as of December 31, 2023
The table below discloses the amounts of cash disaggregated by currency denomination as of December 31, 2023 in each jurisdiction that our affiliated entities are domiciled.
| Currency by Denomination (in USD Equivalents) | ||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| US dollars | Canadiandollars | ChineseRenminbi | Colombian Pesos | Other | Total | |||||||||||||||||
| (In thousands) | ||||||||||||||||||||||
| Jurisdiction of Entity: | ||||||||||||||||||||||
| USA | $ | 189,081 | $ | 188 | $ | — | $ | — | $ | — | $ | 189,269 | ||||||||||
| Singapore | 6,609 | — | — | — | — | 6,609 | ||||||||||||||||
| Canada | 2,905 | 475 | — | — | — | 3,380 | ||||||||||||||||
| Colombia | — | — | — | 3,233 | — | 3,233 | ||||||||||||||||
| China | — | — | 930 | — | — | 930 | ||||||||||||||||
| Cayman Islands | 806 | 2 | — | — | — | 807 | ||||||||||||||||
| British Virgin Islands | 683 | 2 | — | — | — | 685 | ||||||||||||||||
| Other | 35 | 1 | — | — | 94 | 130 | ||||||||||||||||
| Total | $ | 200,119 | $ | 667 | $ | 930 | $ | 3,233 | $ | 94 | $ | 205,043 |
Our subsidiary VRB, domiciled in the Cayman Islands, is subject to certain foreign exchange restrictions with respect to its PRC subsidiaries. There are foreign exchange policies in the PRC that limit the amount of capital that can be directly transmitted offshore from VRB’s PRC subsidiaries to VRB. Since their incorporation, these PRC subsidiaries have had accumulated losses and have not declared or paid any dividends or made any distribution of earnings.
There were no cash transfers to or from our PRC subsidiaries in the form of intercompany loans during the years ended December 31, 2023 and 2022.
Refer to Note 17 of our consolidated financial statements which outlines other restrictions on transfers of net assets from our consolidated subsidiaries to the Company.
Note Payable
In May 2023, as part of the consideration for the acquisition of 5,975 acres of surface title and associated water rights at the Santa Cruz Project we issued to the vendor a secured promissory note in the principal amount of $82.6 million. The promissory note included an annual interest rate of prime plus 1% and is to be paid in installments, In November 2023, Ivanhoe Electric repaid $34.3 million, plus accrued interest of the promissory note. Four equal principal payments of $12.1 million remain to be paid on the first, second, third and fourth anniversaries of the November 2023 payment, plus applicable accrued interest.
Convertible Bond — VRB.
On July 8, 2021, VRB issued a convertible bond for gross proceeds of $24.0 million. The bond has a five-year term and interest accrues at a rate of 8% per annum. Prior to the maturity date, the convertible bond will be automatically
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converted into equity of VRB upon an equity financing or sale event, at a price per share equal to the lower of (A) the transaction price of the equity financing or sale event, and (B) the valuation cap price of $158.0 million divided by the total shares outstanding at the time of the event. If no equity financing or sale event occurs, VRB must repay the outstanding principal and interest on maturity.
Bridge Loan — Cordoba.
In November 2023, JCHX advanced a short-term loan of $4 million to Cordoba in connection with the strategic arrangement for the joint development of Cordoba’s Alacran Project. The short-term loan bears simple interest at 12% per annum which is payable on its maturity date, which is the earlier of (i) 12 months after the date of the loan agreement, and (ii) the date the second installment of $40 million becomes payable by JCHX under the $100 million strategic arrangement. If the maturity date occurs as the date of the second installment, the outstanding amount under the Loan may be deducted from the second installment. In early January 2024, the $4 million loan was fully settled.
Cash Flows
The following table presents our sources and uses of cash for the periods indicated:
| (In thousands) | Year Ended December 31, 2023 | Year Ended December 31, 2022 | ||||
|---|---|---|---|---|---|---|
| Net cash (used in) provided by: | ||||||
| Operating activities | (150,515) | $ | (115,734) | |||
| Investing activities | (150,766) | (48,384) | ||||
| Financing activities | 366,454 | 254,410 | ||||
| Effect of foreign exchange on cash | 210 | (482) | ||||
| Total change in cash | $ | 65,383 | $ | 89,810 |
Operating activities.
Net cash used in operating activities for all periods presented largely was spent on our exploration expenses and our general and administrative costs. We do not generate adequate cash from operations to cover our operating expenses and therefore rely on our financing activities to provide the cash resources to fund our operating and investing activities.
Net cash used in operating activities for the year ended December 31, 2023 was $150.5 million, an increase of $34.8 million from the $115.7 million of net cash used for the year ended December 31, 2022.
Investing activities.
Our investing activities generally relate to acquisitions of mineral property interests, purchases of shares in companies that we may partner with and capital expenditures at our projects. To date, due to our mining projects being in the exploration stage we have not incurred material capital expenditures.
Net cash used in investing activities for the year ended December 31, 2023 of $150.8 million was mainly attributable to $80.5 million related to acquisitions of exploration properties and $68.7 million for purchases of investments subject to significant influence. The $80.5 million of payments for mineral interests included $76.6 million paid to acquire land at the Santa Cruz Project and $3.5 million of option payments at our Tintic Project. The $68.7 million for purchases of investments subject to significant influence primarily consists of our $66.0 million investment in the Ma'aden Joint Venture.
Financing activities.
During the year ended December 31, 2023 there was $366.5 million of net cash provided by financing activities which was primarily from the $319.6 million in net proceeds we raised through issuances our common stock. We raised net proceeds of $123.7 million as a result of the July 2023 private placement with Ma'aden and raised net proceeds of $175.5 million from our September 2023 public offering. In October 2023, we received approximately $20.0 million from Ma’aden exercising their “top-up right” to maintain their 9.9% interest. In addition, we received $3.4 million of proceeds from the exercise of employee stock options during the year ended December 31, 2023. Our subsidiary, Cordoba, raised $39.5 million during the year ended December 31, 2023 in relation to financing its Alacran project through its strategic arrangement with JCHX.
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During the year ended December 31, 2022, there was $254.4 million of net cash provided by financing activities representing the $158.1 million of net cash raised upon the closing of our initial public offering on June 30, 2022, and $86.2 million raised from the sale of the Series 2 Convertible Notes. In addition, Cordoba, received a $10.0 million bridge loan from JCHX in connection with the strategic arrangement for the joint development of the Alacran Project.
Material Cash Obligations
As of December 31, 2023, we had the following material known cash obligations in addition to our discretionary mineral project obligations described above:
| Material Cash Obligations (in thousands) | ||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Total | 2024 | 2025-2026 | 2027-2028 | 2029 onwards | ||||||||||||||
| Note payable(1) | $ | 48,324 | $ | 12,081 | $ | 24,162 | $ | 12,081 | $ | — | ||||||||
| Long-term debt obligations(2) | 24,000 | — | 24,000 | — | — | |||||||||||||
| Typhoon purchase obligations | 6,010 | 4,153 | 1,857 | — | — | |||||||||||||
| Loan from related party(3) | 4,000 | 4,000 | — | — | — | |||||||||||||
| Total material cash obligations | $ | 82,332 | $ | 20,233 | $ | 50,018 | $ | 12,081 | $ | — |
___________
(1)The promissory note was issued as part of the consideration for the acquisition of certain land for the Santa Cruz Project. Four equal principal payments of $12.1 million remain to be paid on the first, second, third and fourth anniversaries of November 2023, plus applicable accrued interest.
(2)The $24.0 million convertible bond issued by VRB that matures in 2026 if not converted to common shares of VRB prior to such date. As of December 31, 2023, the value of the convertible bond including accrued interest was $28.4 million.
(3)JCHX advanced a short-term loan of $4 million to Cordoba in connection with the strategic arrangement for the joint development of Cordoba’s Alacran Project. The loan was fully repaid in January 2024.
Off Balance Sheet Arrangements
As of December 31, 2023, we were not involved in any off-balance sheet arrangements that have or are reasonably likely to have a material effect on our financial condition, results of operations, or liquidity.
Related Party Transactions
See Note 19 of our consolidated financial statements for the years ended December 31, 2023 and 2022.
Critical Accounting Estimates
Our management’s discussion and analysis of our financial condition and results of operations is based on our consolidated financial statements which have been prepared in accordance with U.S. GAAP. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, as well as the disclosure of contingent assets and liabilities as of the date of our financial statements.
Below are the accounting matters that we believe are critical to our financial statements due to the degree of uncertainty regarding the estimates or assumptions involved and the magnitude of the asset, liability, revenue, expense, gain or loss being reported. Actual results may vary from our estimates in amounts that may be material to the financial statements. An accounting estimate is deemed to be critical if it requires an accounting estimate to be made based on assumptions about matters that are highly uncertain at the time the estimate is made, and if different estimates that reasonably could have been used or changes in the accounting estimates that are reasonably likely to occur periodically, could materially impact our financial statements.
We base our assumptions and estimates on historical experience and various other sources that we believe to be reasonable under the circumstances. Actual results may differ from the estimates we calculate due to changes in circumstances, global economics and politics and general business conditions. A summary of our significant accounting policies are detailed in Note 2 to our consolidated financial statements included in this Annual Report. We have outlined below those policies identified as being critical to the understanding of our business and results of operations and that require the application of significant management judgment in developing estimates.
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Recoverable value of exploration mineral interests
We review and evaluate exploration mineral interests for impairment when events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The recoverability of our exploration mineral interests and intangible assets did not involve significant estimation in the periods presented as circumstances did not indicate the carrying amount of our assets may not be recoverable. However, the recoverability of our recorded mineral interests is subject to market factors that could significantly affect the recoverability of our assets, such as commodity prices, results of exploration activities that may affect our intentions to continue under option or earn-in agreements and geopolitical circumstances, particularly in Colombia. By nature, significant changes in these factors are reasonably possible to occur periodically, which could materially impact our financial statements.
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 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 and volatility, which can have a significant impact on the valuation model and resulting expense recorded.
We granted 950,000 stock options during the year ended December 31, 2023. The table below details the options granted and the Black-Scholes option pricing model assumptions used to compute the fair value of the options:
| February 1, 2023 Grant Date | March 1, 2023 Grant Date | July 1, 2023 Grant Date | August 9, 2023 Grant Date | November 1, 2023 Grant Date | |
|---|---|---|---|---|---|
| Number of options granted | 500,000 | 100,000 | 100,000 | 200,000 | 50,000 |
| Exercise price | $13.23 | $15.46 | $13.04 | $16.03 | $11.75 |
| Black-Scholes option-pricing model fair value | $7.22 | $8.53 | $6.95 | $8.46 | $5.96 |
| Black-Scholes option-pricing model assumptions: | |||||
| Risk-free interest rate | 3.7% | 4.5% | 4.4% | 4.4% | 4.2% |
| Dividend yield | nil | nil | nil | nil | nil |
| Estimated volatility | 69.8% | 69.5% | 66.2% | 65.4% | 64.7% |
| Expected option life | 4 years | 4 years | 4 years | 4 years | 4 years |
The risk-free interest rate assumption was based on the U.S. treasury constant maturity yield at the date of the grant over the expected life of the option. No dividends are expected to be paid. We calculated the estimated volatility based on the historical volatility of a group of peer companies’ common stock and a group of relevant stock market indices over the expected option life as we only commenced publicly trading in June 2022. The computation of expected option life was determined based on a reasonable expectation of the option life prior to the option being exercised or forfeited.
Income taxes
We 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 laws in many jurisdictions, including the United States, Canada, Colombia, Peru, Australia, the Ivory Coast and the PRC.
We report income tax in accordance with U.S. GAAP, which requires the establishment of deferred tax accounts for all temporary differences between the financial reporting and tax bases of assets and liabilities, using currently enacted tax rates. In addition, deferred tax accounts must be adjusted to reflect new rates if enacted into law.
Realization of deferred tax assets is contingent on the generation of future taxable income. As a result, we consider whether it is more likely than not that all or a portion of such assets will be realized during periods when they are available, and if not, we provide a valuation allowance for amounts not likely to be recognized. In determining our valuation allowance, we have not assumed future taxable income from sources other than the reversal of existing temporary differences. The extent to which a valuation allowance is warranted may vary as a result of changes in our estimates of future taxable income. In addition to the potential generation of future taxable income through the establishment of
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economic feasibility, development and operation of mines on our exploration assets, estimates of future taxable income could change in the event of disposal of assets, the identification of tax-planning strategies or changes in tax laws that would allow the benefits of future deductible temporary differences in certain entities or jurisdictions to be offset against future taxable temporary differences in other entities or jurisdictions.
We recognize the effect of uncertain income tax positions if those positions are more likely than not of being sustained. The amount recognized is subject to estimates and our judgment with respect to the likely outcome of each uncertain tax position. The amount that is ultimately incurred for an individual uncertain tax position or for all uncertain tax positions in the aggregate could differ from the amount recognized. We had no uncertain tax positions as of December 31, 2023.