Attached files

file filename
EX-32.2 - EXHIBIT 32.2 - Trilogy Metals Inc.exhibit32-2.htm
EX-31.1 - EXHIBIT 31.1 - Trilogy Metals Inc.exhibit31-1.htm
EX-32.1 - EXHIBIT 32.1 - Trilogy Metals Inc.exhibit32-1.htm
EX-31.2 - EXHIBIT 31.2 - Trilogy Metals Inc.exhibit31-2.htm

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

FORM 10-Q

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

For the Quarterly Period Ended May 31, 2015

OR

[  ]  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

NOVACOPPER INC.
(Exact Name of Registrant as Specified in Its Charter)

British Columbia 98-1006991
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) 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  [ X ]  No  [  ]

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  [ X ]  No  [  ]

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  [  ] Accelerated filer  [  ] Non-accelerated filer  [  ] Smaller reporting company  [ X ]
    (Do not check if a smaller reporting  
    company)  

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

As of July 7, 2015, the registrant had 103,876,651 Common Shares, no par value, outstanding.


NOVACOPPER 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 27
Item 4. Controls and Procedures 27
     
PART II - OTHER INFORMATION
    28
Item 1. Legal Proceedings 28
Item 1A. Risk Factors 28
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 28
Item 3. Defaults Upon Senior Securities 28
Item 4. Mine Safety Disclosures 28
Item 5. Other Information 28
Item 6. Exhibits 28

ii


PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

NovaCopper Inc.
(An Exploration-Stage Company)
Consolidated Balance Sheets
As at

(unaudited)

          in thousands of US dollars  
    May 31, 2015     November 30, 2014  
     
Assets            
Current assets            
Cash and cash equivalents   2,732     5,074  
Accounts receivable   104     176  
Deposits and prepaid amounts   600     575  
    3,436     5,825  
             
Plant and equipment (note 3)   181     415  
Mineral properties and development costs (note 4)   30,586     30,586  
    34,203     36,826  
Liabilities            
Current liabilities            
Accounts payable and accrued liabilities (note 5)   1,265     979  
    1,265     979  
Shareholders’ equity            
Share capital (note 6) – unlimited common shares authorized, no par value            
Issued - 60,633,701 (2014 – 60,296,365)   112,469     111,833  
Warrants   2,163     2,163  
Contributed surplus   124     124  
Contributed surplus – options (note6(a,b))   17,432     17,089  
Contributed surplus – units (note 6(c))   1,400     2,008  
Deficit accumulated during the exploration stage   (100,650 )   (97,370 )
    32,938     35,847  
    34,203     36,826  

Nature of operations, structure and plan of arrangement (note 1)
Commitments and contingencies (notes 4, 6, 8)
Subsequent events (note 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


NovaCopper Inc.
(An Exploration-Stage Company)
Consolidated Statements of Loss and Comprehensive Loss
(unaudited)

          in thousands of US dollars, except share and per share amounts  
    For the three months ended     For the six months ended     Cumulative  
                            during  
                            exploration  
    May 31, 2015     May 31, 2014     May 31, 2015     May 31, 2014     stage  
   $    $   $    $   $  
Expenses                              
Amortization   93     208     236     466     3,071  
Foreign exchange (gain) loss   (7 )   16     (27 )   10     (7 )
General and administrative   380     457     761     894     8,567  
Investor relations   4     12     10     43     679  
Mineral properties expense (note 4(c))   291     489     618     1,069     54,387  
Professional fees   685     176     846     826     3,501  
Salaries   219     600     469     1,149     9,113  
Salaries – stock-based compensation (note 6)   89     135     371     251     18,893  
                                 
Total expenses   1,754     2,093     3,284     4,708     98,204  
Other items                              
Accretion expense   -     -     -     -     2,530  
Loss on disposal of equipment   -     -     -     -     7  
Interest and other income   (4 )   -     (4 )   (1 )   (91 )
Loss and comprehensive loss for the period   (1,750 )   (2,093 )   (3,280 )   (4,707 )   (100,650 )
                               
Basic and diluted loss per common share $ 0.03   $ 0.04   $ 0.05   $ 0.09        
                               
 Weighted average number of common shares outstanding   60,633,701     53,637,801     60,624,434     53,572,942        

(See accompanying notes to the interim consolidated financial statements)

3


NovaCopper Inc.
(An Exploration -Stage Company)
Consolidated Statements of Changes in Shareholders’ Equity
(unaudited)

                                  in thousands of US dollars, except share amounts  
                            Contributed     Contributed           Total  
    Number of                 Contributed     surplus –     surplus –           shareholders’  
    shares     Share capital     Warrants     surplus     options     units     Deficit     equity  
    outstanding    $    $    $    $    $    $    $  
Balance – November 30, 2013   53,066,656     104,895     -     152     17,248     2,584     (87,722 )   37,157  
Exercise of NovaGold Arrangement options   46,929     632     -     -     (615 )   -     -     17  
NovaGold Performance Share Units   14,166     28     -     (28 )   -     -     -     -  
Restricted Share Units   425,833     803     -     -     -     (803 )   -     -  
Deferred Share Units   154,373     282     -     -     -     (282 )   -     -  
Stock-based compensation   -     -     -     -     33     218     -     251  
Loss for the period   -     -     -     -     -     -     (4,707 )   (4,707 )
Balance – May 31, 2014   53,707,957     106,640     -     124     16,666     1,717     (92,429 )   32,718  
                                                 
                                                 
                                                 
Balance – November 30, 2014   60,296,365     111,833     2,163     124     17,089     2,008     (97,370 )   35,847  
Restricted Share Units   337,336     636     -     -     -     (636 )   -     -  
Stock-based compensation   -     -     -     -     343     28     -     371  
Loss for the period   -     -     -     -     -     -     (3,280 )   (3,280 )
Balance – May 31, 2015   60,633,701     112,469     2,163     124     17,432     1,400     (100,650 )   32,938  

(See accompanying notes to the interim consolidated financial statements)

4


NovaCopper Inc.
(An Exploration-Stage Company)
Consolidated Statements of Cash Flows
(unaudited)

                      in thousands of US dollars  
    For the three months ended     For the six months ended     Cumulative  
                            during  
                            exploration  
    May 31, 2015     May 31, 2014     May 31, 2015     May 31, 2014     stage  
     $      $      $      $      $  
Cash flows used in operating activities                              
                                 

Loss for the period

  (1,750 )   (2,093 )   (3,280 )   (4,707 )   (100,650 )

Items not affecting cash

                             

   Amortization

  93     208     236     466     3,091  

   Accretion

  -     -     -     -     2,530  

   Loss on disposal of equipment

  -     -     -     -     7  

   Issuance of shares as compensation

  -     -     -     -     316  

   Stock-based compensation

  89     135     371     251     20,006  

Net change in non-cash working capital

                             

   Decrease (increase) in accounts receivable

  (47 )   (112 )   72     (163 )   (104 )

   Decrease (increase) in deposits and prepaid amounts

  (177 )   (165 )   (25 )   (32 )   (587 )

   Increase (decrease) in accounts payable and accrued liabilities

  536     (254 )   301     (232 )   1,303  

 

  (1,256 )   (2,281 )   (2,325 )   (4,417 )   (74,088 )

Cash flows from financing activities

                             

   

                             

Proceeds from private placement, net

  -     -     -     17     7,231  

Proceeds received on exercise of options

  -     -     -     -     36  

Funding provided by NovaGold on the completion of the Plan of Arrangement

  -     -     -     -     40,000  

Funding provided and expenses paid by NovaGold

  -     -     -     -     61,256  

Repayment of notes payable

  -     -     -     -     (24,000 )

Settlement of Restricted Share Units

  -     -     -     -     (329 )

 

  -     -     -     17     84,194  

Cash flows used in investing activities

                             

Acquisition of plant and equipment

  -     -     (17 )   (1 )   (3,258 )

Acquisition of mineral properties

  -     -     -     -     (4,116 )

 

  -     -     (17 )   (1 )   (7,374 )

Increase (decrease) in cash and cash equivalents

  (1,256 )   (2,281 )   (2,342 )   (4,401 )   2,732  

Cash and cash equivalents –

  3,988     4,364     5,074     6,484     -  

   beginning of period

                             

Cash and cash equivalents – end of period

  2,732     2,083     2,732     2,083     2,732  

5



                      in thousands of US dollars  
    For the three months ended     For the six months ended     Cumulative  
                            during  
                            exploration  
                            stage  
                           $  
Non-cash investing and financing activities                              
                                 

Issuance of common shares to NovaGold to acquire NovaCopper US Inc.

  -     -     -     -     27,280  

Notes payable assumed on acquisition of Ambler lands

  -     -     -     -     21,471  

Issuance of common shares by NovaGold to acquire Ambler lands

  -     -     -     -     5,000  

(See accompanying notes to the interim consolidated financial statements)

6


NovaCopper Inc.
(An Exploration-Stage Company)
Notes to the Consolidated Financial Statements

1

Nature of operations, going concern, structure and plan of arrangement

NovaCopper Inc. (“NovaCopper” or the “Company”) was incorporated in British Columbia under the Business Corporations Act (BC) on April 27, 2011. The Company is engaged in the exploration and development of mineral properties including the Arctic and Bornite Projects located in Northwest Alaska in the United States of America (“US”).

Structure and plan of arrangement

On January 11, 2010, Alaska Gold Company (“AGC”), at the time a wholly owned subsidiary of NovaGold Resources Inc. (“NovaGold”), purchased 100% of the Ambler lands, hosting the copper-zinc-lead-gold-silver Arctic Project, for consideration of $29.0 million. The Ambler lands were acquired on October 17, 2011, by NovaCopper US Inc. (“NovaCopper US”) through a purchase and sale agreement with AGC. On October 19, 2011, NovaCopper US acquired the exclusive right to explore the Bornite lands and lands deeded to NANA Regional Corporation, Inc. (“NANA”) through the Alaska Native Claims Settlement Act (“ANCSA”) located adjacent to the Ambler lands to create the Upper Kobuk Mineral Projects (“UKMP Projects”). On October 24, 2011, NovaGold transferred its ownership of NovaCopper US to NovaCopper, then a wholly owned subsidiary of NovaGold, which was subsequently spun-out to NovaGold shareholders and publicly listed on April 30, 2012.

Where applicable, these consolidated financial statements reflect the statements of loss and comprehensive loss, and cash flows of the Arctic Project as if NovaCopper had been independently operating from inception. Prior to the acquisition in 2010, NovaGold held an initial option from 2004 to earn a 51% interest in the property which was terminated upon entering into the purchase and sale agreement. All historical spending prior to April 30, 2012, was funded by NovaGold.

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 NovaCopper and its wholly-owned subsidiary, NovaCopper US. All significant intercompany transactions are eliminated on consolidation. These financial statements were approved by the Company’s Audit Committee on behalf of the Board of Directors for issue on July 7, 2015.

All figures are in United States dollars unless otherwise noted.

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 May 31, 2015, our results of operations and cash flows for the three and six months ended May 31, 2015 and 2014. The results of operations for the three and six months ended May 31, 2015 are not necessarily indicative of the results to be expected for the year ending November 30, 2015.

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, 2014 filed with the U.S. Securities and Exchange Commission (“SEC”) on February 6, 2015.

7


Recent accounting pronouncements

  i.

Development stage entity

In June 2014, the FASB issued “Development Stage Entities – Elimination of Certain Financial Reporting Requirements, Including an Amendment to Variable Interest Entities Guidance in Topic 810, Consolidation” (“ASU 2014-10”). ASU 2014-10 eliminates the concept of a development stage entity, of which NovaCopper had been classified. Upon adoption, certain financial reporting disclosures will be eliminated including the presentation of an inception-to-date statement of income and cash flow. ASU 2014-10 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2014. Early adoption of this standard is permitted. The adoption of ASU 2014-10 is expected to have an impact on the disclosure and presentation of our statement of loss and comprehensive loss and the statement of cash flows. As a result of adopting the standard, we will no longer include the cumulative during exploration stage column currently presented on our statement of loss and comprehensive loss and the statement of cash flows. We plan to adopt for our fiscal year ending November 30, 2016.

  ii.

Going concern

In August 2014, the FASB issued “Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern” (“ASU 2014-15”). Historically, there has been no guidance in U.S. GAAP about management’s responsibility to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern. This update provides the guidance to clarify when and how management should be assessing their ability to continue as a going concern. ASU 2014-15 is effective for fiscal years ending after December 15, 2016. Early adoption of this standard is permitted. We have early adopted this standard for the fiscal year ending November 30, 2015. The adoption of ASU 2014-15 does not have an impact on the frequency with which we conduct going concern assessments and does not result in significant changes to our disclosure of going concern as we previously complied with appropriate guidance issued by the U.S. Securities and Exchange Commission and guidance under U.S. auditing standards.

3

Plant and equipment


                in thousands of dollars  
                May 31, 2015  
          Accumulated        
    Cost     amortization     Net  
   $    $    $  
British Columbia, Canada                  
Furniture and equipment   46     (19 )   27  
Leasehold improvements   32     (17 )   15  
Computer hardware and software   100     (60 )   40  
Alaska, USA                  
Machinery, equipment and camp   2,833     (2,761 )   72  
Vehicles   275     (248 )   27  
Computer hardware and software   31     (31 )   -  
    3,317     (3,136 )   181  

8



                in thousands of dollars  
                November 30, 2014  
          Accumulated        
    Cost     amortization     Net  
   $    $    $  
British Columbia, Canada                  
Furniture and equipment   46     (15 )   31  
Leasehold improvements   32     (13 )   19  
Computer hardware and software   98     (44 )   54  
Alaska, USA                  
Machinery, equipment and camp   2,833     (2,579 )   254  
Vehicles   275     (218 )   57  
Computer hardware and software   31     (31 )   -  
    3,315     (2,900 )   415  

4

Mineral properties and development costs


                in thousands of dollars  
    November 30, 2014     Acquisition costs     May 31, 2015  
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, through 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. As consideration, NovaGold, issued 931,098 shares with a fair value of $5.0 million and agreed to make two cash payments to the vendor of $12.0 million each in January 2011 and January 2012, for total consideration of $29.0 million. The fair value of these future cash payments were $21.4 million valued at the transaction date using a discount rate of approximately 8%. The January 2011 payment was made on January 7, 2011 and the January 2012 payment was made in advance on August 5, 2011. Total fair value of the consideration was $26.5 million, including transaction costs associated with the acquisition of $0.1 million. The vendor retained a 1% net smelter return royalty that the can be purchased at any time for a one-time payment of $10.0 million.

Prior to the acquisition in 2010, NovaGold held an option to earn a 51% interest in the property which was terminated upon entering into the purchase and sale agreement.

As discussed in note 1, the property was acquired on October 17, 2011 by NovaCopper US through a purchase and sale agreement with AGC.

(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 through the ANCSA, located adjacent to the Ambler lands in Northwest Alaska. As consideration, NovaCopper US paid $4.0 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. NANA also has the right to appoint a member to NovaCopper’s board of directors within a five year period following our public listing on a stock exchange. 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 has recovered certain historical costs, 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 $40.0 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.

9


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 percent 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 three and six months ended May 31, 2015 and 2014.

                in thousands of dollars  
    Three months ended  

  Six months ended

 
    May 31, 2015     May 31, 2014     May 31, 2015     May 31, 2014  
   $    $    $    $  
Community   21     23     49     34  
Engineering   13     27     17     102  
Environmental   4     -     4     15  
Land and permitting   100     96     196     189  
Project support   38     75     87     146  
Wages and benefits   115     268     265     583  
Mineral property expense   291     489     618     1,069  

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 from the initial earn-in agreement on the property in 2004 to May 31, 2015 is $54.4 million.

5

Accounts payable and accrued liabilities


          in thousands of dollars  
    May 31, 2015     November 30, 2014  
  $    $  
Trade accounts payable   325     36  
Accrued liabilities   531     410  
Accrued salaries and vacation   409     533  
Accounts payable and accrued liabilities   1,265     979  

At May 31, 2015, accrued salaries and vacation included $352,500 of accrued and unpaid bonuses relating to services provided by officers during the year ended November 30, 2013 which is payable at the time certain conditions are met.

6

Share capital

Authorized:

unlimited common shares, no par value

    in thousands of dollars, except share amounts  
    Number of shares     Ascribed value  
         $  
November 30, 2013   53,066,656     104,895  
Exercise of NovaGold Arrangement options   46,929     631  
NovaGold Performance Share Units   14,166     28  
Private placement   6,521,740     5,068  
Restricted Share Units   492,501     929  
Deferred Share Units   154,373     282  
November 30, 2014   60,296,365     111,833  
Restricted Share Units   337,336     636  
May 31, 2015, issued and outstanding   60,633,701     112,469  

10


On April 30, 2012 (the “Effective Date”), under the Plan of Arrangement, NovaGold distributed its interest in NovaCopper to the shareholders of NovaGold on the basis that each shareholder received one share in NovaCopper for every six shares of NovaGold held on the record date. NovaCopper committed to issue up to 6,181,352 common shares 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 on the same basis as NovaGold shareholders under the Plan of Arrangement. When a warrant is exercised or a unit becomes vested, NovaCopper has 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. An amount of $12.2 million was recorded in contributed surplus representing a pro-rated amount of the historical NovaGold investment based on the fully diluted number of common shares at the Effective Date.

As of May 31, 2015, 20,685 NovaGold DSUs remain outstanding, which will settle upon the retirement of each respective NovaGold director.

(a) Stock options

During the period ended May 31, 2015, 1,620,000 options (May 31, 2014 – nil options) at a weighted-average exercise price of CAD$0.62 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 $0.21.

For the six month period ended May 31, 2015, NovaCopper recognized a stock-based compensation charge of $0.34 million (May 31, 2014 – $0.02 million) for options granted to directors, employees and services providers, net of forfeitures.

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

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

  May 31, 2015
Risk-free interest rates 1.12%
Exercise price CAD$0.62
Expected life 3.0 years
Expected forfeiture rate 3.1%
Expected volatility 59.1%
Expected dividends Nil

As of May 31, 2015, there were 1,245,008 non-vested options outstanding with a weighted average exercise price of $0.75; the non-vested stock option expense not yet recognized was $0.2 million, and 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:

          May 31, 2015  
          Weighted average  
          exercise price  
    Number of options    $  
Balance – beginning of period   1,741,666     1.11  
Granted   1,620,000     0.50  
Forfeited   (200,000 )   0.97  
Balance – end of period   3,161,666     0.75  

11


The following table summarizes information about the stock options outstanding at May 31, 2015.

                Outstanding           Exercisable     Unvested  
                Weighted           Weighted        
    Number of     Weighted     average     Number of     average     Number of  
    outstanding     average years     exercise price     exercisable     exercise price     unvested  
Range of price   options     to expiry    $     options    $     options  
$ 0.50 to $ 0.99   3,106,666     4.40     0.74     1,879,992     0.74     1,226,674  
$ 1.00 to $ 1.59   55,000     2.92     1.59     36,666     1.59     18,334  
    3,161,666     4.37     0.75     1,916,658     0.75     1,245,008  

The aggregate intrinsic value of vested share options (the market value less the exercise price) at May 31, 2015 was $nil (May 31, 2014 - $0.01 million).

(b) NovaGold Arrangement Options

Under the Plan of Arrangement, holders of NovaGold stock options received one option in NovaCopper for every six options held in NovaGold (“NovaGold Arrangement Options”). No stock options granted by NovaGold after the Effective Date are subject to the Plan of Arrangement. All NovaGold Arrangement Options are vested and expense has been recognized as of May 31, 2015.

For the six month period ended May 31, 2015, NovaCopper recognized a stock-based compensation charge of $nil (May 31, 2014 - $0.01 million) for NovaGold Arrangement Options, net of forfeitures.

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

          May 31, 2015  
          Weighted average  
          exercise price  
    Number of options    $  
Balance – beginning of period   721,415     5.06  
Forfeited   (4,356 )   4.73  
Expired   (170,288 )   3.16  
Balance – end of period   546,771     5.10  

The following table summarizes information about the NovaGold Arrangement Options outstanding at May 31, 2015.

          Outstanding and exercisable  
                Weighted average  
    Number of outstanding     Weighted average years     exercise price  
Range of price   and exercisable options     to expiry    $  
$ 2.88 to $ 3.99   66,664     1.40     3.08  
$ 4.00 to $ 5.99   295,071     1.44     4.84  
$ 6.00 to $ 7.99   185,036     0.72     6.24  
    546,771     1.19     5.10  

The aggregate intrinsic value of vested NovaGold Arrangement Options (the market value less the exercise price) at May 31, 2015 was $nil (May 31, 2014 - $nil).

(c) Restricted Share Units and Deferred Share Units

All non-executive directors have elected to receive 50% of their annual retainer in DSUs for the 2015 fiscal year.

12


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

    Number of RSUs     Number of DSUs  
Balance – beginning of period   337,336     838,350  
Granted   -     74,067  
Vested/paid   (337,336 )   -  
Balance – end of period   -     912,417  

For the six months ended May 31, 2015, NovaCopper recognized a stock-based compensation charge of $0.03 million (May 31, 2014 - $0.2 million), net of forfeitures, for RSUs and DSUs.

7

Financial instruments

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 with some expenses incurred in Canadian dollars. The Company’s exposure is limited to cash of CAD$55,000, accounts receivable of CAD$32,000 and accounts payable of CAD$912,000. 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 $60,000.

(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 which are comprised of cash and money market accounts. The Company’s accounts receivable consist of GST receivable from the Federal Government of Canada and receivables due for services provided to other parties. 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 May 31, 2015 are as follows.

in thousand of dollars  
    Total     < 1 Year     1–2 Years     2–5 Years     Thereafter  
   $    $    $    $    $  
Accounts payable and accrued   1,265     1,265     -     -     -  
   liabilities                              
Office lease (note 8)   318     81     237     -     -  
    1,583     1,346     237     -     -  

(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 holds excess cash balances in money market funds which limits the risk of loss due to interest rate changes to $nil.

13



8

Commitment

On January 25, 2013, the Company entered into a commitment to lease office space effective May 1, 2013 for a period of four years. The future minimum lease payments as at the period ended are approximately as follows.

    in thousands of dollars  
    May 31, 2015  
   $  
2015   81  
2016   166  
2017   71  
    318  

9

Subsequent events

On April 22, 2015, the Company entered into a definitive agreement to acquire all of the issued and outstanding common shares of Sunward Resources Ltd. (“Sunward”), a publicly listed company on the TSX, by way of a court-approved plan of arrangement (the “Arrangement”). Shareholders of each of NovaCopper and Sunward voted in favour of the Arrangement at special meetings held on June 15, 2015. The companies received all regulatory, court and stock exchange approvals required and closed the Arrangement on June 19, 2015. Under the terms of the Arrangement, Sunward shareholders received 0.3 of a NovaCopper common share for each Sunward common share held and on June 19, 2015, the Company issued 43.1 million common shares to Sunward shareholders and holders of Sunward deferred share units pursuant to the Arrangement, bringing the Company’s total issued and outstanding common shares to approximately 103.8 million. Each Sunward stock option outstanding was exchanged for a fully-vested option to purchase NovaCopper common shares for a period of 90 days, such number and exercise price adjusted based on an exchange ratio of 0.3 NovaCopper options for each Sunward option. Following closing on June 19, 2015, the combined companies had a cash position of over $20.0 million.

The acquisition will be accounted for as a business combination under Accounting Standards Codification 805, with transaction costs recorded in the statement of loss and comprehensive loss. The total consideration paid was valued at approximately $23.0 million on closing. The identifiable net assets will be recorded at their fair value at June 19, 2015, including the acquisition of the Titiribi exploration property, and will be finalized once management has gathered and reviewed all relevant information.

Effective concurrent with closing of the Arrangement, Mr. Philip O’Neill and Mr. William Hayden joined the Board of Directors. Dr. Thomas Kaplan and Mr. Clynton Nauman tendered their resignation as members of the Board of Directors effective from the date of the Arrangement.

Subsequent to the closing of the Arrangement, Sunward was notified that Luisa Maria Escobar Wolf (“Escobar-Wolf”) has filed a lawsuit in the Fifth Court of Orality of Circuit of Medellin, Colombia to advance a verbal process. Previously, on April 28, 2014, Sunward received notice that Escobar-Wolf filed an arbitral action against Sunward pursuant to the arbitration clause contained in an easement agreement under which Sunward had acquired certain land access rights at the Titiribi Project. Escobar-Wolf alleges that a local water source had been affected as a result of Sunward’s drilling activities at the Titiribi Project and is seeking, amongst other things, damages totalling COP2,623,203,975 (approx. US$1.05 million).

Previously, during 2013, Corantioquia, the environmental agency for the Colombian State of Antioquia, investigated allegations that a local water source had been affected as a result of Sunward’s drilling activities at the Titiribi Project and on December 12, 2013, Corantioquia issued resolution No. 13128232 dismissing the allegations as the environmental agency’s internal studies showed that the water table levels are within acceptable, documented norms. The allegations made by Escobar-Wolf are the same ones Corantioquia had been investigating during 2013, which were dismissed by the environmental agency. Sunward believes that this claim is without merit but it is too early to predict the outcome of the verbal process or the ultimate impact to Sunward.

14


Also, during 2013 Corantioquia notified Sunward of administrative proceedings which would have required a suspension of drilling activities resulting from what the agency alleged to be an omission in failure to obtain a water permit or concession. On October 31 and December 30, 2013, Sunward received notices that Corantioquia had lifted the suspension on future drilling activities but is still considering whether to assess a penalty for failure to obtain water permits. Sunward has received no further correspondence from Corantioquia on an assessment to date.

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, including the Company’s plans and expectations relating to its Upper Kobuk Mineral Projects and the Titiribi Project, completion of transactions, 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, 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;

assumptions regarding our ability to integrate Sunward and maximize shareholder value at the Titiribi exploration asset;

 

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

 

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 Company’s ability to finance its planned exploration activities at its mineral properties or to complete further exploration programs;

risks related to the Company’s ability to finance the development of its mineral properties through external financing, strategic alliances, the sale of property interests or otherwise;

16



risks related to inability to define proven and probable reserves and none of the Company’s mineral properties are in production or under development;

uncertainties relating to the assumptions underlying the Company’s resource estimates, such as geological interpretations, metal pricing, metallurgy, mineability, marketability and operating and capital costs;

risks related to uncertainty of whether there will ever be production at the Company’s mineral exploration and development properties;

risks related to the Company’s ability to commence production and generate material revenues or obtain adequate financing for its planned exploration and development activities;

 

risks related to lack of infrastructure, specifically a lack of road access to the UKMP Projects site;

 

commodity price fluctuations;

 

risks related to market events and general economic conditions;

 

uncertainty of estimates of capital costs, operating costs, production and economic returns;

risks related to inclement weather which may delay or hinder exploration activities at its mineral properties;

 

the Company’s history of losses and expectation of future losses;

risks and uncertainties relating to the interpretation of drill results, the geology, grade and continuity of the Company’s mineral deposits;

 

uncertainty related to inferred mineral resources;

 

uncertainty related to the economic projections contained herein derived from the PEA;

risks related to the third parties on which the Company depends for its exploration and development activities;

mining and development risks, including risks related to infrastructure, accidents, equipment breakdowns, labour disputes or other unanticipated difficulties with or interruptions in development, construction or production;

 

credit, liquidity, interest rate and currency risks;

 

uncertainty as to the Company’s ability to acquire additional commercially mineable mineral rights;

risks and uncertainties relating to the acquisition of the Titiribi Project, such as the Company's ability to successfully explore and develop the Project and realize the anticipated benefits of the acquisition;

risks arising from the Company’s acquisition of Sunward including political risk, international operations, changes in laws or policies, foreign taxation, foreign investment regimes, exchange control, corruption risk, labour matters and employee relations, seizure or expropriation of assets, or delays or the inability to obtain necessary governmental permits, licenses and regulatory approvals in foreign jurisdictions; including guerilla and other criminal activity and

risks and uncertainties relating to the integration of the acquisition, including the Company’s policies, procedures and controls;

 

risks related to increases in demand for equipment, skilled labor and services needed for exploration and

   

development of mineral properties, and related cost increases;

the risk that permits and governmental approvals necessary to develop and operate mines on the Company’s properties will not be available on a timely basis or at all;

risks related to governmental regulation and permits, including environmental regulation, including the risk that more stringent requirements or standards may be adopted or applied;

risks related to the need for reclamation activities on the Company’s properties and uncertainty of cost estimates related thereto;

 

uncertainty related to title to the Company’s mineral properties;

 

risks related to competition in the acquisition of mineral properties;

 

risks inherent in the acquisition of new properties including unknown liabilities;

 

the Company’s need to attract and retain qualified management and technical personnel;

 

risks related to conflicts of interests of some of the directors of the Company;

 

risks related to potential future litigation;

 

risks related to global climate change;

 

risks related to adverse publicity from non-governmental organizations;

risks related to future sales or issuances of equity securities decreasing the value of existing common shares, diluting voting power and reducing future earnings per share;

 

uncertainty as to the volatility in the price of the Company’s shares;

17



 

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;

risks related to the voting power of our majority shareholders and the impact that a sale by such shareholders may have on our share price;

uncertainty as to the Company’s ability to maintain the adequacy of internal control over financial reporting as per the requirements of the Sarbanes-Oxley Act; and

 

increased regulatory compliance costs relating to the Dodd-Frank Act.

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 NovaCopper’s Form 10-K dated February 5, 2015, filed with the Canadian securities regulatory authorities and the United States Securities and Exchange Commission (the “SEC”), and other information released by NovaCopper 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.

General

This Management’s Discussion and Analysis (“MD&A”) of NovaCopper Inc. (“NovaCopper” or “the Company”) is dated July 7, 2015 and provides an analysis of our unaudited interim financial results for the quarter ended May 31, 2015.

The following information should be read in conjunction with our May 31, 2015 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, 2014. A summary of our 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$” are to the currency of Canada, references to “U.S. dollars”, “$” or “US$” are to the currency of the United States and references to “Colombian pesos” or “COP” are to the currency of the Republic of Colombia.

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

NovaCopper’s shares are listed on the Toronto Stock Exchange (“TSX”) and the NYSE-MKT under the symbol “NCQ”. Additional information related to NovaCopper, 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 primarily focused on exploring and developing the Ambler mining district located in Alaska, U.S.A. We conduct our operations through a wholly-owned subsidiary, NovaCopper US Inc. (“NovaCopper US”). Our Upper Kobuk Mineral Projects, 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.

18


Recent activities

Acquisition of Sunward Resources Ltd.

On April 22, 2015, we entered into a definitive agreement to acquire all of the issued and outstanding common shares of Sunward Resources Ltd. (“Sunward”), a publicly listed company on the TSX, by way of a court-approved plan of arrangement (the “Arrangement”). Shareholders of each of NovaCopper and Sunward voted overwhelmingly in favour of the Arrangement at special meetings held on June 15, 2015. The companies subsequently received all regulatory, court and stock exchange approvals required and closed the Arrangement on June 19, 2015. Under the terms of the Arrangement, Sunward shareholders received 0.3 of a NovaCopper common share for each Sunward common share held and at closing, pursuant to the Arrangement, the Company issued 43.1 million common shares to Sunward shareholders and Sunward directors holding Sunward deferred share units, bringing the Company’s total issued and outstanding common shares to approximately 103.8 million. Each Sunward stock option outstanding was exchanged for a fully-vested Sunward Arrangement Option to purchase NovaCopper common shares for a period of 90 days, such number and exercise price adjusted based on an exchange ratio of 0.3.

The combination of NovaCopper and Sunward has created a strong balance sheet with over $20 million in cash for the advancement of the Upper Kobuk Mineral Projects. The Company plans to advance the Arctic deposit towards feasibility. Meanwhile, plans are underway to maximize shareholder value at the Titiribi exploration asset in Colombia, Sunward’s flagship property. Sunward had focused on community engagement at its Titiribi Project, and with its talented and experienced Colombian management team, has built a strong reputation with local communities.

Subsequent to the closing of the Arrangement, Sunward was notified that Luisa Maria Escobar Wolf (“Escobar-Wolf”) has filed a lawsuit in the Fifth Court of Orality of Circuit of Medellin, Colombia to advance a verbal process. Previously, on April 28, 2014, Sunward received notice that Escobar-Wolf filed an arbitral action against Sunward pursuant to the arbitration clause contained in an easement agreement under which Sunward had acquired certain land access rights at the Titiribi Project. Escobar-Wolf alleges that a local water source had been affected as a result of Sunward’s drilling activities at the Titiribi Project and is seeking, amongst other things, damages totalling COP2,623,203,975 (approx. US$1.05 million).

Previously, during 2013, Corantioquia, the environmental agency for the Colombian State of Antioquia, investigated allegations that a local water source had been affected as a result of Sunward’s drilling activities at the Titiribi Project and on December 12, 2013, Corantioquia issued resolution No. 13128232 dismissing the allegations as the environmental agency’s internal studies showed that the water table levels are within acceptable, documented norms. The allegations made by Escobar-Wolf are the same ones Corantioquia had been investigating during 2013, which were dismissed by the environmental agency. Sunward believes that this claim is without merit but it is too early to predict the outcome of the verbal process or the ultimate impact to Sunward.

Also, during 2013 Corantioquia notified Sunward of administrative proceedings which would have required a suspension of drilling activities resulting from what the agency alleged to be an omission in failure to obtain a water permit or concession. On October 31 and December 30, 2013, Sunward received notices that Corantioquia had lifted the suspension on future drilling activities but is still considering whether to assess a penalty for failure to obtain water permits. Sunward has received no further correspondence from Corantioquia on an assessment to date.

Board of Directors

Concurrent with closing of the acquisition of Sunward, Mr. Philip O’Neill and Mr. William Hayden joined NovaCopper’s Board of Directors. To accommodate the addition of the new directors from the Sunward Arrangement, Dr. Thomas Kaplan and Mr. Clynton Nauman have stepped down as members of the Board of Directors. Mr. McConnell replaces Dr. Kaplan as Chairman of the Board.

Upper Kobuk Mineral Projects

We plan to advance the Arctic deposit to pre-feasibility over two to three years. We have approved a budget of $5.5 million for the 2015 field season to complete an in-fill drilling program during July and August at the Arctic deposit with an aim to improve the confidence level of the in-pit inferred resources to measured and indicated and to collect Arctic in-pit geotechnical, hydrological, and acid base accounting data. Funds will also be utilized for environmental studies to continue to build baseline data collection as well as complete a wetlands characterization study in preparation for a pre-feasibility study. We also plan to advance assessment work at Bornite; specifically we plan to evaluate potential synergies between the Arctic and Bornite Projects.

19


During the first half of 2015, we continued to focus efforts on supporting the Alaska Industrial Development Export Authority ("AIDEA”) in working towards drafting an Environmental Impact Statement (“EIS”) as prescribed under the National Environmental Policy Act process to permit the Ambler Mining District Industrial Access Road ("AMDIAR”). The AMDIAR is anticipated to provide access to the Ambler mining district and our UKMP Projects. The Consolidated Right of Way application document is substantially complete. In the first quarter of 2015, the United States Army Corps of Engineers (“USACE”) selected HDR, Inc. as the third party environmental engineer to manage the EIS process on behalf of the USACE. In light of the recent drop in oil prices, the Government of Alaska is reviewing all spending across all State of Alaska entities. We anticipate the permitting process will continue and expect a resolution from the State of Alaska this summer.

With our emphasis on local hiring, we continue to work closely with NANA on oversight of the project, community relations and workforce development strategies.

Annual general meeting

On May 20, 2015, NovaCopper held its annual general meeting of shareholders. The shareholders voted for the election of the directors proposed for nomination in the management proxy circular. The shareholders also voted in favour of the continuation of the 2012 equity incentive plan.

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, were purchased in 2010 are 100% 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. As a result of the spin-out of NovaCopper from NovaGold Resources Inc. (“NovaGold”), the interim consolidated financial statements have been presented under the continuity of interest basis of accounting whereby the amounts are based on the amounts originally recorded by NovaGold as if we had held the property from inception.

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”), NovaCopper US 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.

20


As consideration, NovaCopper paid $4.0 million to NANA upon signing the NANA agreement and gave NANA the right to appoint a member to NovaCopper’s board of directors within a five year period following our public listing on a stock exchange. NANA has not exercised their right to appoint a board member at this time. Upon the decision to proceed with development of a mine within the area of interest, NANA has a 120 day one time 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 NovaCopper has recovered certain historical costs, 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 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. The completion of the agreement with NANA creates a total land package which incorporates our Ambler lands with the adjacent Bornite and ANCSA lands for a total of approximately 352,943 acres (142,831 hectares).

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.

Summary of results

                in thousands of dollars,  
                except for per share amounts  
Selected financial results   Three months     Three     Six months     Six months  
    ended     months     ended     ended  
    May 31, 2015     ended     May 31,     May 31,  
   $     May 31,     2015     2014  
          2014    $    $  
         $              
Amortization   93     208     236     466  
General and administrative   380     457     761     894  
Mineral properties expense   291     489     618     1,069  
Professional fees   685     176     846     826  
Salaries   219     600     469     1,149  
Salaries – stock-based compensation   89     135     371     251  
Loss and comprehensive loss for the period   1,750     2,093     3,280     4,707  
Basic and diluted loss per common share $ 0.03   $ 0.04   $ 0.05   $ 0.09  

For the three months ended May 31, 2015, NovaCopper reported a net loss of $1.8 million (or $0.03 basic and diluted loss per common share) compared to a net loss of $2.1 million for the corresponding period in 2014 (or $0.04 basic and diluted loss per common share). This variance was primarily due to a decrease in salaries and mineral properties expense offset by an increase in professional fees. Salaries expense decreased to $0.2 million in the three months ended May 31, 2015 from $0.6 million for the three months ended May 31, 2014 due to a reduced number of employees in the corporate office. Mineral properties expense decreased by $0.2 million due to a reduction in wages and project support expenses as our 2015 field program is expected to start in July. A minimal level of project activities and project staff were maintained during the winter and spring seasons. The significant increase in professional fees is related to the acquisition of Sunward and related transaction costs. For the comparable period in 2014, financing activities consisted of completing a non-brokered private placement offering of $7.5 million with existing shareholders, involving less legal, consulting and regulatory fees compared to the acquisition transaction.

Other differences in the three months ended May 31, 2015 compared to the three months ended May, 2014 resulted from a reduction in amortization, general and administrative expenses, and stock-based compensation. Amortization expenses decreased by $0.1 million due to the timing of capital asset purchases and resulted amortization expense. General and administrative costs were reduced by approximately 16% from $0.5 million in the three months ended May 31, 2014 to $0.4 million in the three months ended May 31, 2015 due to cost reduction efforts associated with the decrease in corporate office as well as less travel incurred in 2015. Stock-based compensation expenses decreased from a charge of $0.1 million in the 2nd quarter of 2014 compared to $89,000 in the comparable quarter of 2015. The reduction of stock-based compensation was largely due to no Restricted Share Units (“RSUs”) vesting during 2015 resulting in expenses recognized only for previously granted stock options and Deferred Share Units (“DSUs”).

21


For the six months ended May 31, 2015, NovaCopper reported a net loss of $3.3 million (or $0.05 basic and diluted loss per common share) compared to a net loss of $4.7 million for the corresponding period in 2014 (or $0.09 basic and diluted loss per common share). This variance was primarily due to a reduction of salaries expenses to $0.5 million compared to $1.1 million in 2014 and a decrease in mineral property expenses to $0.6 million compared to $1.1 million in 2014. The reduction of salaries was a result of a cost reduction plan implemented in the 3rd quarter of 2014 that reduced the number of employees in the corporate office. The mineral property expenses decreased by $0.5 million due to a reduced number of project staff and less engineering consulting expenses incurred. In the first half of 2014, we were engaged in the update to the Bornite Project resource estimate, a report involving technical and engineering consulting. No comparable expenditure was incurred for the six months ended May 31, 2015.

Other differences in the six months ended May 31, 2015 compared to the six months ended May 31, 2014 resulted from a reduction in amortization expenses and general and administrative expenses offset by an increase in stock-based compensation expense. As noted above, amortization expense decreased due to the timing of capital asset purchases. General and administrative costs were reduced from $0.9 million in the six months ended May 31, 2014 to $0.8 million in the six months ended May 31, 2015 due to continued cost reduction efforts mainly as a result of the reduced corporate office size and lower travel. Offsetting the reduction in expenses is an increase in non-cash stock-based compensation charge of $0.4 million for the six months ended May 31, 2015 compared to $0.3 million in the corresponding period in 2014. Total stock-based compensation expense recognized for the six months ended May 31, 2015 was $0.4 million which included expense of $0.3 million from options granted to directors, employees and services providers under the NovaCopper stock option plan and $0.05 million DSUs granted to directors during the period. For the comparable six month ended May 31, 2014, no stock based compensation grants occurred resulting in minimal expense from previously granted options and RSU units being expensed in the period. $0.8 million in professional fees was expensed in the first half 2015 to complete the Sunward transaction as well as general legal and professional expenses. For the comparable period of 2014, we incurred a similar amount of $0.8 million financing preparation costs relating to the filing of a preliminary prospectus supplement on February 19, 2014 which was not completed.

Selected financial data

Quarterly information

The following unaudited quarterly information is prepared in accordance with U.S. GAAP.

                                        in thousands of dollars,  
                                        except per share amounts  
    Q2 2015     Q1 2015     Q4 2014     Q3 2014     Q2 2014     Q1 2014     Q4 2013     Q3 2013  
    05/31/15     02/28/15     11/30/14     08/31/14     05/31/14     02/28/14     11/30/13     08/31/13  
   $    $    $    $    $    $    $    $  
Interest and other income   4     -     -     1     -     1     4     13  
Mineral property expenses   291     327     596     847     489     580     1,134     4,727  
Loss for the period   (1,750 )   (1,530 )   (2,029 )   (2,911 )   (2,093 )   (2,616 )   (4,931 )   (6,890 )
Loss per common share – basic and diluted   (0.03 )   (0.03 )   (0.03 )   (0.05 )   (0.04 )   (0.05 )   (0.09 )   (0.13 )

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.

During the third quarter of 2013, mineral property expenses of $4.7 million were recorded as the majority of the exploration program was conducted during the quarter. During the fourth quarter of 2013, stock-based compensation of $1.4 million was recorded due to an acceleration of expense as a result of the cancelling of 5,710,000 stock options during the period. All expense for unvested options was accelerated and included in the fourth quarter of 2013. During the first quarter of 2014, we incurred $0.1 million of stock-based compensation expense due to the prior acceleration of expense in the fourth quarter of 2013. As a result, our loss for the first quarter ended February 28, 2014 is significantly reduced. During the second quarter of 2014, we incurred $0.5 million in mineral property expenses as our field season start-up in 2014 occurred in July, later than in previous years. As a result, no field season activity costs were incurred in the second quarter of 2014 resulting in a significantly reduced loss of $2.1 million for the second quarter of 2014 compared to previous second quarter losses. During the third quarter of 2014, we incurred mineral property expenses of $0.8 million due to a reduced field season program resulting in a significantly reduced loss of $2.9 million compared to previous third quarter losses. We also incurred a one-time severance cost of $1.5 million relating to staff reductions. During the fourth quarter of 2014, we incurred $0.6 million of mineral property expenses mainly related to assaying costs incurred for the 2014 field program. Our net loss for the fourth quarter of 2014 of $2.0 million is reduced from the fourth quarter net loss of 2013 of $4.9 million mainly due to lower salaries and general and administrative expenses and a high stock-based compensation charge in 2013. Our loss for the first quarter ended February 28, 2015 is significantly reduced compared to the first quarter ended February 28, 2014 due to reduced professional fees, salaries and mineral property expenses. During the first quarter of 2015, we incurred mineral property expense of $0.3 million mainly on community support and project staff salaries as our field season this year is expected to start up early in the third quarter. We also incurred $0.3 million in stock-based compensation expense to recognize the vesting of stock options and DSUs during the first quarter of 2015. During the second quarter of 2015, we incurred $0.3 million in mineral property expenses, the same level of activities as the first quarter of 2015. We also incurred $0.7 million in professional fees during the second quarter of 2015 mainly due to the acquisition of Sunward.

22


Our properties are not yet in production; consequently, we believe that our loss (and consequent loss per common share) is not a primary concern to investors in the Company.

Liquidity and capital resources

At May 31, 2015, we had $2.7 million in cash and cash equivalents. We expended $1.3 million on operating activities during the six month period ended May 31, 2015, compared with expenditures of $2.3 million for operating activities for the same period in 2014. The majority of cash spent on operating activities during both periods was expended on professional fees, mineral property expenses, general and administrative, and salaries. The decrease in cash spent in the six months ended May 31, 2015 was due to the reduction in mineral property expenses, general and administrative, and salaries mainly due to the decrease in staff at the project and corporate office.

During the six month period ended May 31, 2014, we raised $0.02 million from financing activities due to proceeds received from the exercise of NovaGold Arrangement Options with no comparable amount from financing activities generated in the same period in 2015.

During the six month period ended May 31, 2015 we expended $20,000 cash on investing activities compared to minimal cash spend in 2014. For both periods, the purchases consisted of replacement items for existing equipment.

Subsequent to quarter-end, we closed the acquisition of Sunward resulting in a combined Company cash position over $20 million. As a result of the acquisition, we have sufficient funds to further exploration at the UKMP and have removed our previously disclosed going concern note in the financial statements. We have sufficient working capital for the next twelve months to cover general and administrative expenses and maintain our properties in good standing.

23


Contractual obligations

Contractual obligated undiscounted cash flow requirements as at May 31, 2015 are as follows.

                      in thousands of dollars,  
                      unless otherwise specified  
    Total     < 1 Year     1–3 Years     3–5 Years     > 5 Years  
     $      $      $      $      $  
Accounts payable and accrued liabilities   1,265     1,265     -     -     -  
Office lease   318     81     237     -     -  
Total   1,583     1,346     237     -     -  

Off-balance sheet arrangements

We have no material off-balance sheet arrangements. On January 25, 2013, we entered into a commitment to lease office space effective May 1, 2013 for a period of four years with a remaining total commitment of $0.3 million.

Outstanding share data

At July 7, 2015, we had 103,876,651 common shares issued and outstanding. At July 7, 2015, we had 6,521,740 warrants with a weighted-average exercise price of $1.60, 3,128,333 stock options with a weighted-average exercise price of $0.74, 530,105 NovaGold Arrangement Options with a weighted-average exercise price of $5.06, 833,162 DSUs, 20,685 NovaGold DSUs for which the holder is entitled to receive one common share for every six NovaGold shares received, and 2,505,000 Sunward Arrangement Options with a weighted-average exercise price of C$1.08 which expire September 17, 2015.

24


New accounting pronouncements

Unless otherwise noted, the following revised standards and amendments are effective for annual periods beginning on or after December 1, 2014, or as noted. We are continuing to assess the impact of these standards and amendments or have determined whether we will early adopt them, as noted.

  i.

Development stage entity

In June 2014, the FASB issued “Development Stage Entities – Elimination of Certain Financial Reporting Requirements, Including an Amendment to Variable Interest Entities Guidance in Topic 810, Consolidation” (“ASU 2014-10”). ASU 2014-10 eliminates the concept of a development stage entity, of which NovaCopper had been classified. Upon adoption, certain financial reporting disclosures will be eliminated including the presentation of an inception-to-date statement of income and cash flow. ASU 2014-10 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2014. Early adoption of this standard is permitted. The adoption of ASU 2014-10 is expected to have an impact on the disclosure and presentation of our statement of loss and comprehensive loss and the statement of cash flows. As a result of adopting the standard, we will no longer include the cumulative during exploration stage column currently presented on our statement of loss and comprehensive loss and the statement of cash flows. We plan to adopt for our fiscal year ending November 30, 2016.

25



  ii.

Going Concern

In August 2014, the FASB issued “Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern” (“ASU 2014-15”). Historically, there has been no guidance in U.S. GAAP about management’s responsibility to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern. This update provides the guidance to clarify when and how management should be assessing their ability to continue as a going concern. ASU 2014-15 is effective for fiscal years ending after December 15, 2016. Early adoption of this standard is permitted. We have early adopted this standard for the fiscal year ending November 30, 2015. The adoption of ASU 2014-15 does not have an impact on the frequency with which we conduct going concern assessments and does not result in significant changes to our disclosure of going concern as we previously complied with appropriate guidance issued by the U.S. Securities and Exchange Commission and guidance under U.S. auditing standards

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 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. We have taken steps, in accordance with industry standards, to verify the title to mineral properties in which we have an interest. Although we have made efforts to ensure that legal titles to our mining assets are properly recorded, there can be no assurance that such titles will be secured indefinitely.

Impairment of long-lived assets

Management assesses the possibility of impairment in the carrying value of our long-lived assets whenever events or circumstances indicate that the carrying amounts of the asset or asset group may not be recoverable. Significant estimates 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 or 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, 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.

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.

26



Item 3. Quantitative and Qualitative Disclosures about Market Risk

Our financial instruments are exposed to certain financial risks, including currency risk, credit risk, liquidity risk, interest risk and price risk. Our financial instruments consist of cash and cash equivalents, accounts receivable, deposits, and accounts payable and accrued liabilities. Our instruments are held in the normal course to meet daily operating and cash flow needs of the business. The fair value of accounts payable and accrued liabilities approximates their carrying value due to the short-term nature of their maturity. All of our financial instruments are initially measured at fair value and then held at amortized cost.

(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. We operate in the United States and Canada with some expenses incurred in Canadian dollars. Our exposure is limited to cash of CAD$55,000, accounts receivable of CAD$32,000 and accounts payable of CAD$912,000. 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 $60,000.

(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. We hold cash and cash equivalents with Canadian Chartered financial institutions which are comprised of financial instruments issued by Canadian banks. Our accounts receivable consist of GST receivable from the Federal Government of Canada and receivables due for services provided to other parties. Our 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 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 our liquidity risk through the management of our capital structure and financial leverage. Future financings are expected to be obtained through debt financing, equity financing, 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 “Liquidity and capital resources”.

(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. We hold excess cash balances in money market funds which limits the risk of loss due to interest rate changes to $nil.

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 our 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 May 31, 2015. 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.

27


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. As disclosed previously under Part I -Item 2, Sunward was notified that Luisa Maria Escobar Wolf has filed a lawsuit in the Fifth Court of Orality of Circuit of Medellin, Colombia to advance a verbal process. We do not consider this to be a material litigation.

Item 1A. Risk Factors

There have been no material changes to the risk factors set forth in our Annual Report on Form 10-K for the year ended November 30, 2014, as filed with the SEC on February 6, 2015. The risk factors in our Annual Report on Form 10-K for the year ended November 30, 2014, in addition to the other information set forth in this quarterly report, could materially affect our business, financial condition or results of operations. Additional risks and uncertainties not currently known to us or that we deem to be immaterial could also materially adversely affect our business, financial condition or results of operations.

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

As previously reported on Form 8-K filed on June 25, 2015, we issued 43,116,312 common shares and options to purchase 2,505,000 common shares in the acquisition of Sunward.

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.

28


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: July 10, 2015 NOVACOPPER 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

29


EXHIBIT INDEX

 Exhibit No.   Description
     
2.1   Arrangement Agreement, dated April 22, 2015, between NovaCopper and Sunward (incorporated by reference to Exhibit 2.1 to NovaCopper’s Current Report on Form 8-K filed on April 27, 2015)
     
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
     
**  

Furnished herewith. Pursuant to Rule 406T of Regulation S-T, the Interactive Data Files on Exhibit 101 hereto are deemed not filed or part of any registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, are deemed not filed for purposes of Section 18 of the Securities and Exchange Act of 1934, and otherwise are not subject to liability under those sections.

30