NCQ 2016 10-K

Novacopper Inc (NCQ) SEC Quarterly Report (10-Q) for Q1 2017

NCQ Q2 2017 10-Q
NCQ 2016 10-K NCQ Q2 2017 10-Q

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

ý QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended February 28, 2017
OR

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Transition Period from to
Commission File Number: 1-35447

TRILOGY METALS INC.

(Exact Name of Registrant as Specified in Its Charter)

British Columbia 98-1006991

(State or Other Jurisdiction of

Incorporation or Organization)

(I.R.S. Employer

Identification No.)

Suite 1950, 777 Dunsmuir Street

Vancouver, British Columbia
Canada

V7Y 1K4
(Address of Principal Executive Offices) (Zip Code)

(604) 638-8088

(Registrant's Telephone Number, Including Area Code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ý No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o Accelerated filer o Non-accelerated filer o
(Do not check if a smaller reporting company)
Smaller reporting company ý

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No ý

As of April 3, 2017, the registrant had 105,537,824 Common Shares, no par value, outstanding.

TRILOGY METALS INC.

TABLE OF CONTENTS

Page

PART I - FINANCIAL INFORMATION 2
Item 1. Financial Statements 2
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 16
Item 3. Quantitative and Qualitative Disclosures about Market Risk 26
Item 4. Controls and Procedures 26
PART II - OTHER INFORMATION 27
Item 1. Legal Proceedings 27
Item 1A. Risk Factors 27
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 27
Item 3. Defaults Upon Senior Securities 27
Item 4. Mine Safety Disclosures 27
Item 5. Other Information. 27
Item 6. Exhibits 27

1. PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

Trilogy Metals Inc.

Consolidated Balance Sheets

(unaudited)

in thousands of US dollars

February 28, 2017

$

November 30, 2016

$

Assets
Current assets
Cash and cash equivalents 6,447 7,340
Accounts receivable 30 47
Deposits and prepaid amounts 574 724
Current investments (note 3) 5,869 7,538
12,920 15,649
Investments (note 3)
Plant and equipment (note 4)
Mineral properties and development costs (note 5)

183

195

30,586

297

215

30,586

43,884 46,747
Liabilities
Current liabilities
Accounts payable and accrued liabilities (note 6) 421 593
421 593
Shareholders' equity

Share capital (note 7) – unlimited common shares authorized, no par value

Issued -105,520,261 (2016 – 105,286,469)

136,449 136,357
Warrants (note 7(d)) 2,163 2,163
Contributed surplus 124 124
Contributed surplus – options (note 7(a, b)) 18,351 18,134
Contributed surplus – units (note 7(c)) 1,136 1,140
Deficit (114,760 ) (111,764 )
43,463 46,154
43,884 46,747

Commitments and contingencies (notes 5, 7, 9)

(See accompanying notes to the interim consolidated financial statements)

/s/ Rick Van Nieuwenhuyse, Director /s/ Kalidas Madhavpeddi, Director

Approved on behalf of the Board of Directors

2

Trilogy Metals Inc.

Consolidated Statements of Loss and Comprehensive Loss

(unaudited)

in thousands of US dollars, except share and per share amounts

For the three months ended

February 28, 2017

$

February 29, 2016

$

Expenses
Amortization 20 22
Foreign exchange (gain) loss (80 ) 6
General and administrative 370 346
Investor relations 63 4
Mineral properties expense (note 5(c)) 639 532
Professional fees 125 136
Salaries 239 213
Salaries – stock-based compensation 395 282
Total expenses 1,771 1,541
Other items
Unrealized loss on held for trading investments 1,239 -
Gain on sale of investments (3 ) -
Interest and other income (11 ) (18 )
Loss from continuing operations for the period 2,996 1,523
Loss from discontinued operations - 172
Loss from discontinued operations for the period - 172
Loss and comprehensive loss for the period 2,996 1,695
Basic and diluted loss from continuing operations per common share $ 0.03 $ 0.01
Basic and diluted loss per common share $ 0.03 $ 0.02

Weighted average number of common shares outstanding

105,447,428 104,940,884

(See accompanying notes to the interim consolidated financial statements)

3

Trilogy Metals Inc.

Consolidated Statements of Changes in Shareholders' Equity

(unaudited)

in thousands of US dollars, except share amounts

Number of shares outstanding

Share capital

$

Warrants

$

Contributed surplus

$

Contributed surplus – options

$

Contributed surplus – units

$

Deficit

$

Total shareholders' equity

$

Balance – November 30, 2015 104,796,421 136,040 2,163 124 17,841 1,164 (106,902 ) 50,430
Restricted Share Units 108,399 34 - - - (63 ) - (29 )
Deferred Share Units 75,000 29 - - - (29 ) - -
Stock-based compensation - - - - 184 98 - 282
Loss for the period - - - - - - (1,695 ) (1,695 )
Balance – February 29, 2016 104,979,820 136,103 2,163 124 18,025 1,170 (108,597 ) 48,988
Balance – November 30, 2016 105,286,469 136,357 2,163 124 18,134 1,140 (111,764 ) 46,154
Exercise of options 24,594 9 - - (9 ) - - -
Restricted Share Units 209,198 83 - - - (173 ) - (90 )
Stock-based compensation - - - - 226 169 - 395
Loss for the period - - - - - - (2,996 ) (2,996 )
Balance – February 28, 2017 105,520,261 136,449 2,163 124 18,351 1,136 (114,760 ) 43,463

(See accompanying notes to the interim consolidated financial statements)

4

Trilogy Metals Inc.

Consolidated Statements of Cash Flows

(unaudited)

in thousands of US dollars

For the three months ended

February 28, 2017

$

February 29, 2016

$

Cash flows used in operating activities
Loss for the period (2,996 ) (1,695 )
Items not affecting cash
Amortization 20 54
Unrealized loss on held for trading investments 1,239 -
Unrealized foreign exchange (gain) loss (92 ) -
Gain on sale of investments (3 ) -
Stock-based compensation 395 282
Net change in non-cash working capital
Decrease in accounts receivable 17 8
Decrease in deposits and prepaid amounts 150 175
(Decrease) in accounts payable and accrued liabilities (172 ) (254 )
(1,442 ) (1,430 )
Cash flows from (used in) financing activities
Settlement of Restricted Share Units (90 ) (29 )
(90 ) (29 )
Cash flows from (used in) investing activities
Acquisition of plant & equipment - (2 )
Proceeds from the sale of investments, net of fees 639 -
639 (2 )
Increase (decrease) in cash and cash equivalents (893 ) (1,461 )
Cash and cash equivalents – beginning of period 7,340 16,139
Cash and cash equivalents – end of period 6,447 14,678
Less cash and cash equivalents of discontinued operations – end of period - (24 )
Cash and cash equivalents of continuing operations – end of period 6,447 14,654

(See accompanying notes to the interim consolidated financial statements)

5

Trilogy Metals Inc.

Notes to the Consolidated Financial Statements

1. Nature of operations

Trilogy Metals Inc., formerly NovaCopper Inc., ("Trilogy" or the "Company") was incorporated in British Columbia under the Business Corporations Act (BC) on April 27, 2011. The Company changed its name from NovaCopper Inc. to Trilogy Metals Inc. on September 1, 2016 to better reflect its diversified metals resource base. The Company is engaged in the exploration and development of mineral properties with a focus on the Upper Kobuk Mineral Projects ("UKMP"), including the Arctic and Bornite Projects located in Northwest Alaska in the United States of America ("US").

2. Summary of significant accounting policies

Basis of presentation

These consolidated financial statements have been prepared using accounting principles generally accepted in the United States ("U.S. GAAP") and include the accounts of Trilogy and its wholly-owned subsidiary, NovaCopper US Inc. ("NovaCopper US"). These consolidated financial statements include the accounts of Sunward Resources Ltd. ("Sunward"), Sunward Investments Ltd. ("Sunward Investments") and Sunward Resources Limited ("Sunward BVI") for the period June 19, 2015 to September 1, 2016, inclusive. Sunward BVI has registered a branch, Sunward Resources Sucursal Colombia, to do business in Colombia. All significant intercompany transactions are eliminated on consolidation.

On June 19, 2015, we completed the acquisition of Sunward, which held 100% ownership in the Titiribi gold-copper exploration project in Colombia through Sunward Investments. Sunward was converted to Sunward Resources Unlimited Liability Company on June 19, 2015 and wound-up on February 29, 2016. On September 1, 2016, we completed the sale of Sunward Investments and the Titiribi project. The Company classified the operations of Sunward Investments as discontinued operations, retrospectively.

All figures are in United States dollars unless otherwise noted. References to CDN$ refer to amounts in Canadian dollars.

The unaudited interim consolidated financial statements include all adjustments of a normal recurring nature necessary for the fair presentation of our financial position as of February 28, 2017, our results of operations and cash flows for the three months ended February 28, 2017, and February 29, 2016. The results of operations for the three months ended February 28, 2017 are not necessarily indicative of the results to be expected for the year ending November 30, 2017.

As these interim consolidated financial statements do not contain all of the disclosures required by U.S. GAAP for annual financial statements, these unaudited interim consolidated financial statements should be read in conjunction with the annual financial statements and related notes included in our Annual Report on Form 10-K for the fiscal year ended November 30, 2016 filed with the U.S. Securities and Exchange Commission ("SEC") on February 3, 2017.

These financial statements were approved by the Company's Audit Committee on behalf of the Board of Directors for issue on April 3, 2017.

6

Recent accounting pronouncements

i. Leases

In February 2016, the FASB issued new accounting requirements for accounting for, presentation of, and classification of leases ("ASU 2016-02"). This will result in most leases being capitalized as a right of use asset with a related liability on our balance sheets. The requirements of the new standard are effective for annual reporting periods beginning after December 15, 2018, and interim periods within those annual periods, which for us is the first quarter of fiscal year 2020. We expect the adoption will have an impact as we expect to capitalize leases, specifically our office leases that are not currently recognized on the balance sheet and are in the process of analyzing the quantitative impact of this guidance on our results of operations and financial position.

ii. Stock-based compensation

In March 2016, the FASB issued new guidance simplifying the accounting for stock-based compensation transactions, including income tax consequences, classification of awards as equity or liabilities, forfeitures, and classification on the statement of cash flows ("ASU 2016-09"). This update is effective for annual reporting periods beginning after December 15, 2016, and early adoption is permitted. The Company has analyzed the impact of the update and determined that the simplification applied to accounting for forfeitures will affect the results of operations and financial position as it will alter the timing of recognition of forfeitures. The Company is currently considering its policy choice. The remaining changes in the update do not have an effect on the Company's accounting for stock-based compensation.

iii. Business combinations

In January 2017, the FASB issued new guidance to assist in determining if a set of assets and activities being acquired or sold is a business ("ASU 2017-01"). It also provided a framework to assist entities in evaluating whether both an input and a substantive process are present, which at a minimum, must be present to be considered a business. This update is effective for annual reporting periods beginning after December 15, 2017, and early adoption is permitted in most circumstances. It expects there could be an impact to how the Company accounts for assets acquired in the future.

3. Investments

On September 1, 2016, Trilogy completed the sale of Sunward Investments to GoldMining Inc. ("GMI"), formerly Brazil Resources Inc., a public company listed on the TSX-Venture exchange, of all of the issued and outstanding shares of Sunward Investments for consideration of 5,000,000 common shares of GMI valued at $7.8 million and 1,000,000 warrants, with each warrant exercisable into one common share of GMI for a period of two years at an exercise price of Cdn$3.50, valued at $0.3 million for total consideration of $8.1 million. Of the common shares received, 2,500,000 common shares were saleable immediately with the remaining 2,500,000 common shares saleable six months following the close. Sunward Investments, through a subsidiary, owns 100% of the Titiribi gold-copper exploration project.

The common shares and warrants received have been designated as held-for-trading financial assets, with the classification as current investments and long-term investments, respectively.

7

in thousands of dollars

February 28, 2017

$

November 30, 2016

$

Current investments 5,869 7,538
Long-term investments 183 297
Investments 6,052 7,835

The fair value of the common shares is determined based on the closing price at each period end. The fair value of the BRI warrants is determined using the Black-Scholes option pricing model at each period end.

During the three months ended February 28, 2017, the Company realized a gain on sale of $3 on the sale of 410,000 common shares of GMI sold during the period. For the three months ended February 28, 2017, the Company recognized an unrealized loss on the common shares and warrants of GMI of $1.2 million.

4. Plant and equipment

in thousands of dollars

February 28, 2017

Cost

$

Accumulated

amortization

$

Net

$

British Columbia, Canada
Furniture and equipment 46 (35 ) 11
Leasehold improvements 32 (31 ) 1
Computer hardware and software 108 (98 ) 10
Alaska, USA
Machinery, and equipment 2,921 (2,805 ) 116
Vehicles 348 (291 ) 57
Computer hardware and software 31 (31 ) -
3,486 (3,290 ) 195

in thousands of dollars

November 30, 2016

Cost

$

Accumulated

amortization

$

Net

$

British Columbia, Canada
Furniture and equipment 46 (33 ) 13
Leasehold improvements 32 (28 ) 4
Computer hardware and software 108 (96 ) 12
Alaska, USA
Machinery, and equipment 2921 (2,798 ) 123
Vehicles 348 (285 ) 63
Computer hardware and software 31 (31 ) -
3,486 (3,271 ) 215

8

5. Mineral properties and development costs

in thousands of dollars

November 30, 2016

$

Acquisition costs

$

February 28, 2017

$

Alaska, USA
Ambler (a) 26,586 - 26,586
Bornite (b) 4,000 - 4,000
30,586 - 30,586

in thousands of dollars

November 30, 2015

$

Acquisition costs

$

November 30, 2016

$

Alaska, USA
Ambler (a) 26,586 - 26,586
Bornite (b) 4,000 - 4,000
30,586 30,586

(a) Ambler

On January 11, 2010, NovaGold Resources Inc. ("NovaGold"), through Alaska Gold Company ("AGC"), at the time a wholly-owned subsidiary, purchased 100% of the Ambler lands in Northwest Alaska, which contains the copper-zinc-lead-gold-silver Arctic Project and other mineralized targets within the volcanogenic massive sulfide belt, through a series of cash and share payments. Total fair value of the consideration was $26.6 million. The vendor retained a 1% net smelter return royalty that the owner of the property can purchase at any time for a one-time payment of $10.0 million.

The Ambler lands were acquired on October 17, 2011 by NovaCopper US through a purchase and sale agreement with AGC. On October 24, 2011, NovaGold transferred its ownership of NovaCopper US to the Company, then a wholly owned subsidiary of NovaGold, which was subsequently spun-out to NovaGold shareholders and publicly listed on April 30, 2012 ("NovaGold Arrangement").

(b) Bornite

On October 19, 2011, NovaCopper US acquired the exclusive right to explore and the non-exclusive right to access and enter on the Bornite lands, and lands deeded to NANA Regional Corporation, Inc. ("NANA") through the Alaska Native Claims Settlement Act, located adjacent to the Ambler lands in Northwest Alaska. As consideration, NovaCopper US paid $4 million to acquire the right to explore and develop the combined Upper Kobuk Mineral Projects through an Exploration Agreement and Option to Lease with NANA. Upon a decision to proceed with construction of a mine on the lands, NANA maintains the right to purchase between a 16%-25% ownership interest in the mine or retain a 15% net proceeds royalty which is payable after NovaCopper US has recovered certain historical costs, including capital and cost of capital. Should NANA elect to purchase an ownership interest, consideration will be payable equal to all historical costs incurred on the properties at the elected percentage purchased less $40 million, not to be less than zero. The parties would form a joint venture and be responsible for all future costs, including capital costs of the mine based on their pro-rata share.

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

(c) Mineral properties expense

The following table summarizes mineral properties expense for the noted periods.

9

In thousands of dollars

Three months ended February 28, 2017

$

Three months ended February 29, 2016

$

Alaska, USA
Community 56 55
Engineering 269 173
Environmental - 8
Geochemistry and geophysics - 12
Land and permitting 104 98
Project support 47 39
Wages and benefits 163 147
Mineral property expense 639 532

Mineral property expenses consist of direct drilling, personnel, community, resource reporting and other exploration expenses as outlined above, as well as indirect project support expenses such as fixed wing charters, helicopter support, fuel, and other camp operation costs. Cumulative mineral properties expense in Alaska from the initial earn-in agreement on the property in 2004 to February 28, 2017 is $63.6 million and cumulative acquisition costs are $30.6 million totaling $94.2 million spent to date.

6. Accounts payable and accrued liabilities

in thousands of dollars

February 28, 2017

$

November 30, 2016

$

Trade accounts payable 89 160
Accrued liabilities 249 281
Accrued salaries and vacation 83 152
Accounts payable and accrued liabilities 421 593

7. Share capital

Authorized:

unlimited common shares, no par value

in thousands of dollars, except share amounts

Number of shares

Ascribed value

$

November 30, 2015 104,796,421 136,040
Exercise of options 162,854 65
Restricted Share Units 108,399 34
Deferred Share Units 218,795 218
November 30, 2016 105,286,469 136,357
Exercise of options 24,594 9
Restricted Share Units 209,198 83
February 28, 2017, issued and outstanding 105,520,261 136,449

On April 30, 2012, under the NovaGold Arrangement, Trilogy committed to issue up to 6,181,352 common shares, once vested and exercised, to satisfy holders of NovaGold warrants ("NovaGold Warrants"), performance share units ("NovaGold PSUs") and deferred share units ("NovaGold DSUs") on record as of the close of business April 27, 2012. When exercised or vested, Trilogy committed to deliver one Common Share to the holder for every six shares of NovaGold the holder is entitled to receive, rounded down to the nearest whole number. All NovaGold Warrants have been exercised and all NovaGold PSUs have vested. As of February 28, 2017, 20,685 NovaGold DSUs remain outstanding representing a right to receive 3,447 Common Shares in Trilogy, which will settle upon certain directors retiring from NovaGold's board, and 66,664 NovaGold Arrangement Options remain outstanding as disclosed in note 7(b).

10

(a) Stock options

During the period ended February 28, 2017, 1,595,000 options (February 29, 2016 – 1,785,000 options) at a weighted-average exercise price of CAD$0.70 (February 29, 2016 – CAD$0.44) were granted to employees, consultants and directors exercisable for a period of five years with various vesting terms between nil and two years. The weighted-average fair value attributable to options granted in the period was $0.22.

For the period ended February 28, 2017, Trilogy recognized a stock-based compensation charge of $0.22 million (February 29, 2016– $0.18 million) for options granted to directors, employees and service providers, net of forfeitures.

The fair value of the stock options recognized in the period has been estimated using the Black-Scholes option pricing model.

Assumptions used in the pricing model for the period are as provided below.

February 28, 2017
Risk-free interest rates 0.91 %
Exercise price CDN$0.70
Expected life 3.0 years
Expected volatility 74.2 %
Expected dividends Nil

As of February 28, 2017, there were 1,425,009 non-vested options outstanding with a weighted average exercise price of $0.44; the non-vested stock option expense not yet recognized was $0.2 million. This expense is expected to be recognized over the next two years.

A summary of the Company's stock option plan and changes during the period ended is as follows:

February 28, 2017

Number of options

Weighted average exercise price

$

Balance – beginning of period 6,049,433 0.50
Granted 1,595,000 0.53
Exercised (71,666 ) 0.34
Forfeited (63,335 ) 0.35
Balance – end of period 7,509,432 0.52

11

The following table summarizes information about the stock options outstanding at February 28, 2017.

Outstanding Exercisable Unvested
Range of price Number of outstanding options Weighted average years to expiry

Weighted average exercise price

$

Number of exercisable options

Weighted average exercise price

$

Number of unvested options
$0.33 to $0.50 4,564,432 3.46 0.39 3,852,762 0.39 711,670
$0.51 to $1.00 2,890,000 3.78 0.70 2,176,661 0.76 713,339
$1.01 to $1.49 55,000 1.17 1.49 55,000 1.49 -
7,509,432 3.57 0.52 6,084,423 0.53 1,425,009

The aggregate intrinsic value of vested share options (the market value less the exercise price) at February 28, 2017 was $0.2 million (February 29, 2016 - $0.01 million) and the aggregate intrinsic value of exercised options for the three months ended February 28, 2017 was $0.01 million (February 29, 2016 - $nil).

(b) NovaGold Arrangement Options

Under the NovaGold Arrangement, holders of NovaGold stock options received one option in Trilogy for every six options held in NovaGold ("NovaGold Arrangement Options"). All NovaGold Arrangement Options are vested and subject to NovaGold's stock option plan. The options were fully expensed during the year ended November 30, 2014 and no further expense is recognized.

A summary of the NovaGold Arrangement Options and changes during the period ended is as follows:

February 28, 2017

Number of options

Weighted average exercise price

$

Balance – beginning of period 312,195 4.28
Expired (245,531 ) 4.45
Balance – end of period 66,664 3.83

The following table summarizes information about the NovaGold Arrangement Options outstanding at February 28, 2017.

Outstanding and exercisable
Range of price Number of outstanding options Weighted average years to expiry

Weighted average exercise price

$

$2.78 to $3.99 49,998 0.08 2.94
$4.00 to $5.99 - - -
$6.00 to $6.48 16,666 0.25 6.51
66,664 0.12 3.83

The aggregate intrinsic value of vested NovaGold Arrangement Options (the market value less the exercise price) at February 28, 2017 was $nil (February 29, 2016 - $nil).

12

(c) Restricted Share Units and Deferred Share Units

The Company has a Restricted Share Unit Plan ("RSU Plan") and a Non-Executive Director Deferred Share Unit Plan ("DSU Plan") to provide long-term incentives to employees, officers and directors. The RSU Plan and DSU Plan may be settled in cash and/or Common Shares at the Company's election with each RSU and DSU entitling the holder to receive one common share of the Company or equivalent value. All units are accounted for as equity-settled awards.

A summary of the Company's unit plans and changes during the period ended is as follows:

Number of RSUs Number of DSUs
Balance – beginning of period 400,001 925,390
Granted 600,000 33,258
Vested/paid (399,999 ) -
Balance – end of period 600,002 958,648

For the three months ended February 28, 2017, Trilogy recognized a stock-based compensation charge of $0.17 million (February 29, 2016- $0.10 million), net of forfeitures.

On December 15, 2016, 600,000 RSUs were granted to officers vesting one third immediately, one third on the first anniversary of the grant date, and one third on the second anniversary. On December 23, 2016, 399,999 RSUs vested and were settled through the issuance of 209,198 shares and a cash payment of $90,000 to cover tax withholdings.

(d) Share Purchase Warrants

A summary of the Company's warrants and changes during the three months ended February 28, 2017 is as follows:

Number of Warrants

Weighted average years to expiry

Weighted average exercise price

$

Balance – beginning of period 6,521,740 2.60 1.60
Balance – end of period 6,521,740 2.60 1.60

8. Financial instruments

The Company is exposed to a variety of risks arising from financial instruments. These risks and management's objectives, policies and procedures for managing these risks are disclosed as follows.

The Company's financial instruments consist of cash and cash equivalents, accounts receivable, deposits, investments, and accounts payable and accrued liabilities. The fair value of the Company's financial instruments approximates their carrying value due to the short-term nature of their maturity. The Company's financial instruments initially measured at fair value and then held at amortized cost include cash and cash equivalents, accounts receivable, deposits, and accounts payable and accrued liabilities. The Company's investments are held for trading and are marked-to-market at each period end with changes in fair value recorded to the statement of loss.

Financial risk management

The Company's activities expose them to certain financial risks, including currency risk, credit risk, liquidity risk, interest risk and price risk.

(a) Currency risk

Currency risk is the risk of a fluctuation in financial asset and liability settlement amounts due to a change in foreign exchange rates. The Company operates in the United States and Canada. The Company's exposure to currency risk at February 28, 2017 is limited to the Canadian dollar consisting of cash of CDN$1,364,000, accounts receivable of CDN$27,000, deposit amounts of CDN$147,000, investments of CDN$8,038,000 and accounts payable of CDN$348,000. Based on a 10% change in the US-Canadian exchange rate, assuming all other variables remain constant, the Company's net loss would change by approximately $632,000.

13

(b) Credit risk

Credit risk is the risk of an unexpected loss if a customer or third party to a financial instrument fails to meet its contractual obligations. The Company holds cash and cash equivalents with Canadian Chartered financial institutions. The Company's accounts receivable consist of GST receivable from the Federal Government of Canada and other receivables for recoverable expenses. The Company's exposure to credit risk is equal to the balance of cash and cash equivalents and accounts receivable as recorded in the financial statements.

(c) Liquidity risk

Liquidity risk is the risk that the Company will encounter difficulties raising funds to meet its financial obligations as they fall due. The Company is in the exploration stage and does not have cash inflows from operations; therefore, the Company manages liquidity risk through the management of its capital structure and financial leverage.

Contractually obligated cash flow requirements as at February 28, 2017 are as follows.

in thousands of dollars

Total

$

<1 Year

$

1–2 Years

$

2–5 Years

$

Thereafter

$

Accounts payable and accrued liabilities 421 421 - - -
Office lease (note 9) 1,340 115 167 543 515
1,761 536 167 543 515

On February 21, 2017, the Company entered into a lease for office space effective July 1, 2017 for a period of seven years with a total commitment of $1.3 million.

(d) Interest rate risk

Interest rate risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market interest rates. The Company is exposed to interest rate risk with respect to interest earned on cash and cash equivalents. Based on balances as at February 28, 2017, a 1% change in interest rates would result in a change in net loss of $0.1 million, assuming all other variables remain constant.

As we are currently in the exploration phase none of our financial instruments are exposed to commodity price risk; however, our ability to obtain long-term financing and its economic viability could be affected by commodity price volatility.

Fair value accounting

Financial instruments measured at fair value are classified into one of three levels in the fair value hierarchy according to the significance of the inputs used in making the measurement. The three levels of the fair value hierarchy are as follows:

Level 1 - Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities;

Level 2 - Quoted prices in markets that are not active, or inputs that are observable, either directly or indirectly, for substantially the full term of the asset or liability; and

Level 3 - Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (supported by little or no market activity)

14

The levels in the fair value hierarchy into which the Company's financial assets and liabilities that are measured and recognized at fair value on a recurring basis were categorized as follows:

in thousands of dollars

February 28, 2017

$

November 30, 2016

$

Level 1 Level 2 Level 3 Level 1 Level 2 Level 3
Current investments – shares 5,869 - - 7,538 - -
Investments – warrants - - 183 - - 297

The Company's investments consist of shares and warrants in a publicly-held mining company. The share investments are recorded as current investments and are valued using quoted market prices in active markets and as such are classified as a Level 1 financial instrument. The warrants are valued using a Black-Scholes pricing model and are considered a Level 3 financial instrument because the valuation models have significant unobservable inputs.

9. Commitment

The Company has commitments in respect of office leases requiring future minimum lease payments as follows:

in thousands of dollars

February 28, 2017

$

2017 115
2018

167

2019 173
2020 181
2021 189
2022-2024 515
Total 1,340

15

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

Cautionary notes

Forward-looking statements

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

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

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

· assumptions made in the interpretation of drill results, and of the geology, grade, and continuity of the Company's mineral deposits;
· our ability to achieve production at any of the Company's mineral exploration and development properties;
· our expected ability to develop adequate infrastructure and that the cost of doing so will be reasonable;
· assumptions that all necessary permits and governmental approvals will be obtained;
· estimated capital costs, operating costs, production and economic returns;
· estimated metal pricing, metallurgy, mineability, marketability and operating and capital costs, together with other assumptions underlying the Company's resource and reserve estimates;
· continued good relationships with local communities and other stakeholders;
· our expectations regarding demand for equipment, skilled labour and services needed for exploration and development of mineral properties;
· assumptions regarding the merit of litigation; and
· that our activities will not be adversely disrupted or impeded by development, operating or regulatory risks.

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

· risks related to the inability to define proven and probable reserves;

16

· risks related to our ability to finance the development of our mineral properties through external financing, strategic alliances, the sale of property interests or otherwise;
· none of the Company's mineral properties are in production or are under development;
· uncertainties relating to the assumptions underlying our resource estimates, such as metal pricing, metallurgy, mineability, marketability and operating and capital costs;
· risks related to lack of infrastructure including but not limited to the risk whether or not the AMDIAP will receive the requisite permits and, if it does, whether AIDEA will build the AMDIAP;
· uncertainty as to whether there will ever be production at the Company's mineral exploration and development properties;
· uncertainty as to estimates of capital costs, operating costs, production and economic returns;
· risks related to our ability to commence production and generate material revenues or obtain adequate financing for our planned exploration and development activities;
· risks related to future sales or issuances of equity securities decreasing the value of existing Trilogy common shares, diluting voting power and reducing future earnings per share;
· risks related to market events and general economic conditions;
· uncertainty related to inferred mineral resources;
· uncertainty related to the economic projections contained herein derived from the Preliminary Economic Assessment titled "Preliminary Economic Assessment Report on the Arctic Project, Ambler Mining District, Northwest Alaska" dated effective September 12, 2013;
· risks related to inclement weather which may delay or hinder exploration activities at its mineral properties;
· risks and uncertainties relating to the interpretation of drill results, the geology, grade, and continuity of our mineral deposits;
· mining and development risks, including risks related to infrastructure, accidents, equipment breakdowns, labor disputes or other unanticipated difficulties with or interruptions in development, construction or production;
· the risk that permits and governmental approvals necessary to develop and operate mines at our mineral properties will not be available on a timely basis or at all;
· commodity price fluctuations;
· risks related to governmental regulation and permits, including environmental regulation, including the risk that more stringent requirements or standards may be adopted or applied due to circumstances unrelated to the Company and outside of its control;
· risks related to the need for reclamation activities on our properties and uncertainty of cost estimates related thereto;
· uncertainty related to title to our mineral properties;
· our history of losses and expectation of future losses;
· risks related to increases in demand for equipment, skilled labor and services needed for exploration and development of mineral properties, and related cost increases;
· our need to attract and retain qualified management and technical personnel;
· risks related to conflicts of interests of some of our directors;
· risks related to potential future litigation;
· risks related to the voting power of our major shareholders and the impact that a sale by such shareholders may have on our share price;
· risks related to global climate change;
· risks related to adverse publicity from non-governmental organizations;
· uncertainty as to the volatility in the price of the Company's shares;
· the Company's expectation of not paying cash dividends;
· adverse federal income tax consequences for U.S. shareholders should the Company be a passive foreign investment company;
· uncertainty as to our ability to maintain the adequacy of internal control over financial reporting as per the requirements of Section 404 of the Sarbanes-Oxley Act; and
· increased regulatory compliance costs, associated with rules and regulations promulgated by the United States Securities and Exchange Commission (the "SEC"), Canadian Securities Administrators, the NYSE-MKT, the TSX, and the Financial Accounting Standards Boards, and more specifically, our efforts to comply with the Dodd-Frank Wall Street Reform and Consumer Protection Act.

17

This list is not exhaustive of the factors that may affect any of the Company's forward-looking statements. Forward-looking statements are statements about the future and are inherently uncertain, and actual achievements of the Company or other future events or conditions may differ materially from those reflected in the forward-looking statements due to a variety of risks, uncertainties and other factors, including, without limitation, those referred to in Trilogy's Form 10-K dated February 2, 2017, filed with the Canadian securities regulatory authorities and the SEC, and other information released by Trilogy and filed with the appropriate regulatory agencies.

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

Cautionary note to United States investors

Reserve and resource estimates

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

18

General

This Management's Discussion and Analysis ("MD&A") of Trilogy Metals Inc. ("Trilogy", "Trilogy Metals", "the Company" or "we") is dated April 3, 2017 and provides an analysis of our unaudited interim financial results for the quarter ended February 28, 2017 compared to the quarter ended February 29, 2016.

The following information should be read in conjunction with our February 28, 2017 unaudited interim consolidated financial statements and related notes which were prepared in accordance with United States generally accepted accounting principles ("U.S. GAAP"). The MD&A should also be read in conjunction with our audited consolidated financial statements and related notes for the year ended November 30, 2016. A summary of the U.S. GAAP accounting policies are outlined in note 2 of the audited consolidated financial statements. All amounts are in United States dollars unless otherwise stated. References to "Canadian dollars" and "C$" and "CDN$" are to the currency of Canada and references to "U.S. dollars", "$" or "US$" are to the currency of the United States.

Erin Workman, P.Geo., an employee and the Director, Technical Services, is a Qualified Person under National Instrument 43-101 - Standards of Disclosure for Mineral Projects ("NI 43-101"), and has approved the scientific and technical information in this MD&A.

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

Description of business

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

Project activities

Ambler Mining District Industrial Access Project

In March 2017, we announced a significant milestone that the permitting process had advanced on the Ambler Mining District Industrial Access Project ("AMDIAP") with the publishing of the Notice of Intent ("NOI") by the Bureau of Land Management ("BLM") on February 28, 2017. The NOI initiates the permitting process under the National Environmental Policy Act ("NEPA") for the preparation of an Environmental Impact Statement ("EIS") on the AMDIAP. The BLM is the lead Federal agency for the EIS. This notice initiates the public scoping process for the EIS with comments due by May 30, 2017.

The Notice of Intent states that the various federal and state agencies intend to prepare an EIS for Federal authorization to construct and operate an approximately 211-mile long industrial access road in the southern Brooks Range foothills of Alaska, originating at the Dalton Highway and ending at the Ambler River and providing access to the Ambler Mining District. The BLM has announced the beginning of the EIS scoping process to solicit public comments and identify issues. The BLM intends to coordinate the development of the EIS with the National Park Service ("NPS"), which is in accordance with the Alaska National Interest Lands Conservation Act ("ANILCA"). The NPS is developing a separate environmental and economic analysis solely for the purpose of determining the most desirable route for that portion of the proposed road right-of-way that would cross the Gates of the Arctic National Preserve. More information on the AMDIAP and the ANILCA permitting process is available on AIDEA's website at www.ambleraccess.org, which website is not incorporated by reference.

19

The AMDIAP is anticipated to provide surface access to the Ambler Mining District, long known to contain significant deposits of copper, lead, zinc, gold and silver and specifically including the Company's Upper Kobuk Mineral Projects – Arctic and Bornite.

We are also working closely with AIDEA to amend the Memorandum of Understanding ("MOU"), originally signed in 2013, as the industrial road route has been selected and permitting documents have been submitted to the relevant US federal agencies. We will work with AIDEA, as the proponent for the AMDIAP, to have a direct input into the permitting process for the road and have the ability to attend meetings with the BLM, as the lead federal agency for the EIS process.

Arctic Project

In the first quarter of 2017, we completed a number of studies to incorporate information collected over the past several years to guide our 2017 site investigations for pre-feasibility. In February 2017, we completed a pre-feasibility level slope geotechnical and hydrogeological study for the Arctic deposit based on drilling completed during 2015 and 2016. We also completed a number of environmental site investigation reports in regards to aquatics, avian, large mammal habitat, wetlands, archeology, and water quality that were based on information collected during the 2016 field program.

In February 2017, we initiated a scoping level study of ore sorting technologies for the Arctic Project. The study considers the application of sorting methods to sort and upgrade the feed grade, increase the metal production and reduce the amount of waste material being transported to the mill – work is on-going and expected to continue into the second quarter of 2017.

During summer 2016, five drill holes were completed at the Arctic project to support a pre-feasibility level metallurgical test program. We retained ALS Metallurgy of Kamloops, British Columbia to complete the test work. The study will include confirmation of the metallurgical response of a Master Composite of approximately 400 kilograms, assessment of the variance in metallurgical responses across the deposit, and completion of copper-lead separation testing – work is on-going and expected to continue into the second quarter of 2017.

In January 2017, we completed incorporating new surface mapping, a LiDAR survey, and drill hole information into an updated 3D geology model for the Arctic deposit. In February 2017, we completed a QA/QC review of ABA static analyses collected from the hanging wall of the Arctic deposit. The ABA static analyses, along with new assays collected from 2015 and 2016 drill core and specific gravity determinations collected from waste and the mineralized material are currently being incorporated into a resource model update, the results of which will be released in the second quarter of 2017.

We continue to advance our understanding of ABA/ML waste characterization at the Arctic project, in support of this task we plan to continue monthly sampling of laboratory Humidity Cell Tests through the end of 2017. In March 2017, we reached the 70-week milestone in our monthly sampling program.

Bornite Project

We continue to advance a mineralogical and metallurgical test program on the open pit zone of the Bornite deposit through the first quarter. The study will include mineralogical characterization through quantitative analysis (QEMSCAN) and optimization of the metallurgical parameters on drill holes collected in 2013 to best recover the base and precious metal values in the mineralized material – work is on-going and expected to continue into the second quarter of 2017 as planned.

In November 2016, we retained SRK Consulting of Vancouver, British Columbia to review hydrogeological conditions at the Bornite property, update the hydrogeological conceptual model and provide recommendations for future data collection – work is on-going and expected to continue into the second quarter of 2017.

20

Corporate developments

Long-term incentives

During the quarter ended February 28, 2017, the Board of Directors approved the granting of 1,595,000 stock options to employees, consultants and directors with various vesting terms over two years and 600,000 restricted share units ("RSUs") to officers vesting equally in thirds on the grant date, the first anniversary of the grant date, and the second anniversary of the grant date.

Outlook

Our 2017 program has a budget of $7.1 million to be expended during the fiscal year to advance the Arctic Project to pre-feasibility. The pre-feasibility study ("PFS") will be supported by information collected during the 2015 and 2016 field seasons as well as additional information to be collected during the 2017 summer field program. We will be completing geotechnical drilling, hydrology installations, and test pits for site facility locations and mine design, and geophysical ground surveys to evaluate ground conditions. A significantly expanded environmental baseline program will be underway in 2017 to further the ongoing baseline data collection at the Arctic Project. Aquatics, avian and large mammal surveys will be continued and expanded, water balance programs will be expanded, and collection of data from the existing meteorological station will continue. Surface water quality testing will continue the programs initiated in earlier years and groundwater quality monitoring will begin. Previous wetlands delineation information will be analyzed during the year for submission of a jurisdictional determination application. The completion of the 2017 field program will complete a staged three-year site investigation program where the first two years focused almost exclusively on collecting data in and around the proposed Arctic open-pit, and the third year focuses on infrastructure and mine design.

The completion of the field program in 2017 will support the prefeasibility study on the Arctic Project expected to be completed in the first quarter of 2018.

Property review

Our principal assets, the UKMP Projects, are located in the Ambler mining district in Northwest Alaska. Our UKMP Projects comprise approximately 352,943 acres (142,831 hectares) consisting of the Ambler and Bornite lands.

Arctic Project

The Ambler lands, which host a number of deposits, including the high-grade copper-zinc-lead-gold-silver Arctic Project, and other mineralized targets within a 100 kilometer long volcanogenic massive sulfide ("VMS") belt, are owned by NovaCopper US. The Ambler lands are located in Northwestern Alaska and consist of 112,058 acres (45,348 hectares) of Federal patented mining claims and State of Alaska mining claims, within which VMS mineralization has been found.

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

Bornite Project

On October 19, 2011, NovaCopper US and NANA signed a collaborative agreement to explore and develop the Ambler mining district. Under the Exploration Agreement and Option to Lease (the "NANA Agreement"), we acquired the exclusive right to explore the Bornite property and lands deeded to NANA through the Alaska Native Claims Settlement Act ("ANCSA"), located adjacent to the Arctic Project, and the non-exclusive right to access and entry onto NANA's lands. The agreement establishes a framework for any future development of either the Bornite Project or the Arctic Project. Both projects are included as part of a larger area of interest set forth in the NANA Agreement. The agreement with NANA created a total land package incorporating our Ambler lands with the adjacent Bornite and ANCSA lands with a total area of approximately 352,900 acres (142,831 hectares).

21

As consideration, $4.0 million was paid to NANA upon signing the NANA agreement. Upon the decision to proceed with development of a mine within the area of interest, NANA maintains the right to purchase an ownership interest in the mine equal to between 16%-25% or retain a 15% net proceeds royalty which is payable after we have recovered certain historical costs, including capital and cost of capital. Should NANA elect to purchase an ownership interest in the mine, consideration will be payable based on the elected percentage purchased and all the costs incurred on the properties less $40.0 million, not to be less than zero. The parties would form a joint venture and be responsible for all future costs incurred in connection with the mine, including capital costs of the mine, based on each party's pro-rata share.

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

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

Summary of results

in thousands of dollars,

except for per share amounts

Three months ended
Selected expenses

February 28, 2017

$

February 29, 2016

$

General and administrative 370 346
Mineral properties expense 639 532
Professional fees 125 136
Salaries 239 213
Salaries – stock-based compensation 395 282
Unrealized loss on held for trading investments 1,239 -
Loss from continuing operations for the period 2,996 1,523
Loss from discontinued operations for the period - 172
Loss and comprehensive loss for the period 2,996 1,695
Basic and diluted loss per common share $ 0.03 $ 0.02

For the three months ended February 28, 2017, Trilogy reported a net loss of $3.0 million (or $0.03 basic and diluted loss per common share) compared to a net loss of $1.7 million for the corresponding period in 2016 (or $0.02 basic and diluted loss per common share). This variance was primarily due to an unrealized loss on investments of $1.2 million classified as held for trading for which movements in the fair value of the investments are recorded through the statement of loss. The investments consist of common shares and warrants in GoldMining Inc. ("GMI") acquired as consideration for the sale of Sunward Investments Limited ("Sunward") and its Titiribi gold-copper exploration project in Colombia. A gain on the sale of 410,000 common shares of GMI sold during the period of $3,000 was recognized during the three months ended February 28, 2017. There are no comparable amounts for the three months ended February 29, 2016 as the Company acquired the investments in September 2016.

Adjusting for the unrealized loss on held for trading investments, a loss from continued operations of $1.8 million for the three months ended February 28, 2017 is comparable to the loss from continued operations of $1.5 million for the three months ended February 29, 2016. The increase is due to an increase in mineral properties expenses and stock-based compensation. We incurred $0.6 million in mineral properties expense for the three months ended February 28, 2017 compared to $0.5 million for the three months ended February 29, 2016. The increase in mineral property expenses in 2017 is attributable to several ongoing engineering studies, specifically an updated 3D geology model and resource estimate for the Arctic deposit, metallurgical test programs on the Arctic and Bornite Projects, completion of a pre-feasibility level slope geotechnical and hydrology study on the Arctic deposit, and a review of the hydrogeological conditions at the Bornite property. Waste characterization is also continuing on the Arctic Project which began in 2016. The increase in stock-based compensation is due to a higher share price contributing to an overall greater fair value for option grants in the period compared to the prior period. General and administrative expenses, salaries, and professional fees continue to be at comparable levels in the periods presented.

22

The basic and diluted loss per common share of $0.03 for the three months ended February 28, 2017 is increased from the basic and diluted loss per common share of $0.02 for the three months ended February 29, 2016 due to the increased loss as described above.

Selected financial data

Quarterly information

in thousands of dollars,

except per share amounts

Q1 2017 Q4 2016 Q3 2016 Q2 2016 Q1 2016 Q4 2015 Q3 2015 Q2 2015

02/28/17

$

11/30/16

$

08/31/16

$

05/31/16

$

02/29/16

$

11/30/15

$

08/31/15

$

05/31/15

$

Interest and other income 11 10 15 18 18 12 8 4
Mineral property expenses 639 1,430 2,617 458 532 779 2,771 291
Income (loss) from discontinued operations for the period - 4,561 (352 ) (187 ) (172 ) (200 ) (198 ) -
Earnings (loss) for the period (2,996 ) 2,025 (3,544 ) (1,648 ) (1,695 ) (2,090 ) (4,162 ) (1,750 )
Earnings (loss) per common share – basic and diluted (0.02 ) 0.02 (0.03 ) (0.02 ) ( 0.02 ) (0.02 ) (0.04 ) (0.03 )

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

During the second quarter of 2015, we incurred $0.3 million in mineral property expenses mainly on technical studies in preparation for field season. We also incurred $0.7 million in professional fees during the second quarter of 2015 mainly due to the acquisition of Sunward. During the third quarter of 2015, we incurred mineral property expenses of $2.8 million as we completed our drilling program. We also incurred $0.2 million of discontinued operation costs operating Sunward. As a result, our loss for the third quarter ended August 31, 2015 is higher compared to previous quarter losses. Our net loss for the fourth quarter of 2015 of $2.1 million consists of $0.8 million in mineral property expenses incurred for assay costs and engineering studies conducted in the fall as well as $0.2 million in discontinued operation costs from Sunward.

Our loss for the first quarter ended February 29, 2016 is comparable to typical first quarter losses in that it consists mainly of mineral property expenses relating to engineering studies completed in advance of the 2016 field program. The loss is increased slightly due to costs related to operating Sunward during the period of $0.2 million when compared to periods where Trilogy did not own Sunward. During the second quarter of 2016, we incurred $0.5 million in mineral property expenses due to field season starting up in the last month of the second quarter and $0.2 million in discontinued operations relating to Sunward. During the third quarter of 2016, we incurred mineral property expenses of $2.6 million as we completed our drilling program. As a result, our loss for the third quarter ended August 31, 2016 is higher compared to previous quarter losses and consistent with the spending in the third quarter of 2015. We recognized earnings for the fourth quarter of 2016 of $2.0 million due to the gain on the sale of Sunward. Adjusted for the discontinued operations, the fourth quarter periods are substantially comparable.

Our loss for the first quarter ended February 28, 2017 of $3.0 million is significantly increased compared to prior quarterly periods due to an unrealized loss on held for trading investments of $1.2 million. The investments are classified as held for trading for which movements in the fair value of the investments are recorded through the statement of loss.

23

Liquidity and capital resources

At February 28, 2017, we had $6.4 million in cash and cash equivalents. We expended $1.4 million on operating activities during the three months ended February 28, 2017 compared with $1.4 million for operating activities for the same period in 2016. A majority of cash spent on operating activities during all periods was expended on mineral property expenses, general and administrative, salaries and professional fees. As at February 28, 2017, the Company continues to manage its cash expenditures and management believes that the working capital available is sufficient to meet its operational requirements for the next year. Future financings are anticipated through the sale of investments, equity financing, debt financing, convertible debt, or other means.

During the three months ended February 28, 2017, we generated $0.6 million in proceeds from the sale of investments. The proceeds were used for general operating activities. There was no comparable amount from financing activities in 2016 as we acquired the investments in September 2016.

During the three months ended February 28, 2017 and three months ended February 29, 2016, $0.1 million was used in financing activities to pay statutory employee withholding taxes on Restricted Share Units that vested in the respective periods.

Contractual obligations

Contractual obligated undiscounted cash flow requirements as at February 28, 2017 are as follows.

in thousands of dollars

Total

$

<1 Year

$

1–2 Years

$

2–5 Years

$

Thereafter

$

Accounts payable and accrued liabilities 421 421 - - -
Office lease 1,340 115 167 543 515
1,761 536 167 543 515

On February 21, 2017, the Company entered into a lease for office space effective July 1, 2017 for a period of seven years with a total commitment of $1.3 million.

Off-balance sheet arrangements

We have no material off-balance sheet arrangements. The Company has lease commitments for office spaces with a remaining total commitment of $1.3 million.

Outstanding share data

At April 3, 2017, we had 105,537,824 common shares issued and outstanding. At April 3, 2017, we had outstanding 6,521,740 warrants with an exercise price of $1.60 each, 7,440,000 stock options with a weighted-average exercise price of $0.52, 997,631 DSUs, 600,002 RSUs, 49,998 NovaGold Arrangement Options with a weighted-average exercise price of $4.05, and 20,685 NovaGold DSUs for which the holder is entitled to receive one common share for every six NovaGold shares received. For additional information on NovaGold Arrangement Options and NovaGold DSUs, please refer to note 7 in our February 28, 2017 interim consolidated financial statements. Upon exercising all of the forgoing convertible securities, the Company would be required to issue aggregate of 15,612,818 common shares.

New accounting pronouncements

Certain recent accounting pronouncements have been included under note 2 in our February 28, 2017 unaudited interim consolidated financial statements

24

Critical accounting estimates

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

Mineral properties and development costs

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

Impairment of long-lived assets

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

Income taxes

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

Stock-based compensation

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

Additional information

Additional information regarding the Company, including our annual report on Form 10-K, is available on SEDAR at www.sedar.com and EDGAR at www.sec.gov and on our website at www.trilogymetals.com. Information contained on our website is not incorporated by reference.

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Item 3. Quantitative and Qualitative Disclosures about Market Risk

Our financial instruments consist of cash and cash equivalents, accounts receivable, deposits, investments, and accounts payable and accrued liabilities. The fair value of the financial instruments approximates their carrying value due to the short-term nature of their maturity. Our financial instruments initially measured at fair value and then held at amortized cost include cash and cash equivalents, accounts receivable, deposits, and accounts payable and accrued liabilities. Our investments are held for trading and are marked-to-market at each period end with changes in fair value recorded to the statement of loss.

(e) Currency risk

Currency risk is the risk of a fluctuation in financial asset and liability settlement amounts due to a change in foreign exchange rates. We operate in the United States and Canada. Our exposure to currency risk at February 28, 2017 is limited to the Canadian dollar consisting of cash of CDN$1,364,000, accounts receivable of CDN$27,000, deposit amounts of CDN$147,000, investments of CDN$8,038,000 and accounts payable of CDN$348,000. Based on a 10% change in the US-Canadian exchange rate, assuming all other variables remain constant, the Company's net loss would change by approximately $632,000.

(f) Credit risk

Credit risk is the risk of an unexpected loss if a customer or third party to a financial instrument fails to meet its contractual obligations. We hold cash and cash equivalents with Canadian Chartered financial institutions. Our accounts receivable consist of GST receivable from the Federal Government of Canada and other receivables for recoverable expenses. Our exposure to credit risk is equal to the balance of cash and cash equivalents and accounts receivable as recorded in the financial statements.

(g) Liquidity risk

Liquidity risk is the risk that we will encounter difficulties raising funds to meet our financial obligations as they fall due. We are in the exploration stage and do not have cash inflows from operations; therefore, we manage liquidity risk through the management of the capital structure and financial leverage. Future financings may be obtained through debt financing, equity financing, sales of investments, convertible debt, exercise of options, or other means. Continued operations are dependent on our ability to obtain additional financing or to generate future cash flows. Our contractually obligated cash flow is disclosed under the section titled "Contractual Obligations."

(h) Interest rate risk

Interest rate risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market interest rates. We are exposed to interest rate risk with respect to interest earned on cash and cash equivalents. Based on balances as at February 28, 2017, a 1% change in interest rates would result in a change in net loss of $0.1 million, assuming all other variables remain constant.

As we are currently in the exploration phase none of our financial instruments are exposed to commodity price risk; however, our ability to obtain long-term financing and its economic viability could be affected by commodity price volatility.

Item 4. Controls and Procedures

Management, with the participation of our President and Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act) as of February 28, 2017. On the basis of this review, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective to ensure that the information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC and to ensure that information required to be disclosed in the reports filed or submitted under the Exchange Act is accumulated and communicated to our management, including our President and Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

There have not been any changes in the Company's internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) promulgated by the SEC under the Exchange Act) during the Company's most recently completed fiscal quarter that have materially affected, or are reasonably likely to materially affect the Company's internal control over financial reporting. Any system of internal control over financial reporting, no matter how well designed, has inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.

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PART II - OTHER INFORMATION

Item 1. Legal Proceedings

From time to time, we are a party to routine litigation and proceedings that are considered part of the ordinary course of its business. We are not aware of any material current, pending, or threatened litigation.

Item 1A.  Risk Factors

Trilogy and its future business, operations and financial condition are subject to various risks and uncertainties due to the nature of its business and the present stage of exploration of its mineral properties. Certain of these risks and uncertainties are under the heading "Risk Factors" under Trilogy's Form 10-K dated February 2, 2017, which is available on SEDAR at www.sedar.com, EDGAR at www.sec.gov and on our website at www.trilogymetals.com.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

None

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

These disclosures are not applicable to us.

Item 5. Other Information.

None.

Item 6. Exhibits

Exhibits

See Exhibit Index.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

Date: April 4, 2017 TRILOGY METALS INC.
By: /s/ Rick Van Nieuwenhuyse
Rick Van Nieuwenhuyse
President and Chief Executive Officer

By: /s/ Elaine M. Sanders
Elaine M. Sanders
Vice President and Chief Financial Officer

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EXHIBIT INDEX

Exhibit No. Description
31.1 Certification of the Chief Executive Officer required by Rule 13a-14(a) or Rule 15d-14(a)
31.2 Certification of the Chief Financial Officer required by Rule 13a-14(a) or Rule 15d-14(a)  
32.1 Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350
32.2 Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350
101 Interactive Data Files
101.INS XBRL Instance Document
101.SCH XBRL Taxonomy Extension Schema Document
101.CAL XBRL Taxonomy Extension Calculation Linkbase Document
101.LAB XBRL Taxonomy Extension Label Linkbase Document
101.PRE XBRL Taxonomy Extension Presentation Linkbase Document
101.DEF XBRL Taxonomy Extension Definition Linkbase Document
* Certain schedules and exhibits to this agreement have been omitted in accordance with Item 601 (b)(2) of Regulation S-K. A copy of any omitted schedule and/or exhibit will be furnished to the Securities and Exchange Commission upon request.

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