CONSOLIDATED FINANCIAL STATEMENTS

(Expressed in United States Dollars, unless otherwise stated)

FOR THE YEAR ENDED DECEMBER 31, 2020

MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL REPORTING

The accompanying consolidated financial statements of Aquila Resources Inc. were prepared by management in accordance with International Financial Reporting Standards ("IFRS") as issued by the International Accounting Standards Board ("IASB"). Management acknowledges responsibility for the preparation and presentation of the consolidated financial statements, including responsibility for significant accounting judgments and estimates and the choice of accounting principles and methods that are appropriate to the Company's circumstances.

Management has established processes, which are in place to provide them sufficient knowledge to support management representations that they have exercised reasonable diligence that (i) the consolidated financial statements do not contain any untrue statement of material fact or omit to state a material fact required to be stated or that is necessary to make a statement not misleading in light of the circumstances under which it is made, as of the date of and for the periods presented by the consolidated financial statements and (ii) the consolidated financial statements fairly present in all material respects the financial condition, results of operations and cash flows of the Company, as of the date of and for the periods presented by the consolidated financial statements.

The Board of Directors is responsible for reviewing and approving the financial statements together with other financial information of the Company and for ensuring that management fulfills its financial reporting responsibilities.

The Board of Directors exercises its responsibilities through the Audit Committee of the Board which meets to satisfy itself that management's responsibilities are properly discharged and with the external auditors to review the financial statements before they are presented to the Board of Directors for approval.

Management recognizes its responsibility for conducting the Company's affairs in compliance with established financial standards, and applicable laws and regulations, and for maintaining proper standards of conduct for its activities.

The Audit Committee has met with the Company's independent auditor to review the scope and results of the annual audit and to review the consolidated financial statements and related financial reporting matters prior to recommending the consolidated financial statements be approved.

The Company's independent auditor, PricewaterhouseCoopers LLP, has conducted an audit in accordance with generally accepted auditing standards in Canada, and their report follows.

Signed

"Guy Le Bel"

"Stephanie Malec"

Chief Executive Officer and Director

Chief Financial Officer

Toronto, Canada

March 30, 2021

1

Independent auditor's report

To the Shareholders of Aquila Resources Inc.

Our opinion

In our opinion, the accompanying consolidated financial statements present fairly, in all material respects, the financial position of Aquila Resources Inc. and its subsidiaries (together, the Company) as at December 31, 2020 and 2019, and its financial performance and its cash flows for the years then ended in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board (IFRS).

What we have audited

The Company's consolidated financial statements comprise:

  • the consolidated statements of financial position as at December 31, 2020 and 2019;
  • the consolidated statements of net loss and other comprehensive loss for the years then ended;
  • the consolidated statements of changes in shareholders' equity for the years then ended;
  • the consolidated statements of cash flows for the years then ended; and
  • the notes to the consolidated financial statements, which include significant accounting policies and other explanatory information.

Basis for opinion

We conducted our audit in accordance with Canadian generally accepted auditing standards. Our responsibilities under those standards are further described in the Auditor's responsibilities for the audit of the consolidated financial statements section of our report.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.

Independence

We are independent of the Company in accordance with the ethical requirements that are relevant to our audit of the consolidated financial statements in Canada. We have fulfilled our other ethical responsibilities in accordance with these requirements.

Material uncertainty related to going concern

We draw attention to note 1 in the consolidated financial statements, which describes events or conditions that indicate the existence of a material uncertainty that may cast significant doubt about the Company's ability to continue as a going concern. Our opinion is not modified in respect of this matter.

PricewaterhouseCoopers LLP

PwC Tower, 18 York Street, Suite 2600, Toronto, Ontario, Canada M5J 0B2

T: +1 416 863 1133, F: +1 416 365 8215

"PwC" refers to PricewaterhouseCoopers LLP, an Ontario limited liability partnership.

2

Key audit matters

Key audit matters are those matters that, in our professional judgment, were of most significance in our audit of the consolidated financial statements for the year ended December 31, 2020. These matters were addressed in the context of our audit of the consolidated financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. In addition to the matter described in the Material uncertainty related to going concern section, we have determined the matters described below to be the key audit matters to be communicated in our report.

Key audit matter

Assessment of impairment indicators of mineral property costs

Refer to note 2 - Accounting policies, note 3 - Critical accounting estimates and judgments and note 5 - Mineral property costs to the consolidated financial statements.

The carrying amount of the Company's mineral property costs amounted to $24.7 million as at December 31, 2020, out of which $24.1 million relate to the Back Forty project (the project).

Management applies judgment in assessing whether there are any indicators relating to mineral property costs for impairment, when facts and circumstances suggest that the carrying amount may exceed its recoverable amount. If any such indicator exists, then an impairment test is performed by management.

The key judgments related to the impairment assessment of mineral property costs include consideration of (i) the permitting process and right to explore the project, (ii) continued plans to further explore and evaluate mineral resources,

  1. the ability to undertake feasibility studies to assess the technical feasibility or commercial viability of the project and (iv) other facts and circumstances suggesting that the carrying amount exceeds the recoverable amount.

How our audit addressed the key audit matter

Our approach to addressing the matter included the following procedures, among others:

  • Evaluated the judgment made by management in assessing the impairment indicators, which included the following:
    • Obtained mining permits in relation to the project to assess (i) the right to explore the area and (ii) title expiration dates.
    • Read the Board of Directors' meeting minutes and obtained budget approvals as evidence of continued plans to further explore and evaluate mineral resources, which included evaluating results of current year work programs and management's longer term plans.
    • Read mine technical reports and assessed whether these reports have not led to the discovery of commercially viable quantities of mineral resources, or whether mineral property costs had no material economic value to the project's business plan.
    • Assessed whether there are other changes in circumstances indicating that the mineral property costs may not be recoverable, based on the evidence obtained in other areas of the audit.

3

We considered this a key audit matter due to the significance of the mineral property costs and the key judgments made by management in its assessment of indicators of impairment related to mineral property costs, and these have resulted in a high degree of subjectivity in performing audit procedures related to these judgments applied by management.

Valuation of contingent consideration

Our approach to addressing the matter included

the following procedures, among others:

Refer to note 2 - Accounting policies, note 3 - Critical accounting estimates and judgments and note 4 - Contingent consideration to the consolidated financial statements.

In 2013, the shareholders approved the acquisition of 100% of the shares of HudBay Michigan Inc., giving the Company 100% ownership in the project. The consideration issued by the Company includes future milestone payments amounting to $9 million (contingent consideration) tied to the development of the project.

The contingent consideration, payable by the Company, was initially recognized at the fair value and subsequently remeasured at each reporting date, with the changes to fair value recognized in the consolidated statement of net loss and comprehensive loss. Each milestone payment is assessed separately based on the probability of achieving the milestone requirement

For the remeasurement of contingent consideration at each reporting date, management uses a time value of money calculation using certain key assumptions such as (i) expected commencement dates of development activities,

  1. discount rates and (iii) the assessment of key risks including permitting, completion of feasibility study and timing of commercial production.
    Management applies judgment in assigning a probability weighting to each of the key risks,
  • Obtained understanding of management's estimation process and tested how management remeasured the fair value of the contingent consideration, which included the following:
    • Evaluated the appropriateness of the calculation of the contingent consideration.
    • Tested the judgment applied by management in assigning the probability weight to the likelihood of each milestone payment, which included the following:
      o Examined correspondences between the Company and the relevant regulatory authorities and the steps taken by management in relation to obtaining required permits for the project to raise financing, construct the mine and the eventual achievement of commercial production.
      o Performed look back procedures, where applicable, to assess management's ability to achieve targets by comparing actual completed activities to approved plans toward the development of the Back

4

Attachments

  • Original document
  • Permalink

Disclaimer

Aquila Resources Inc. published this content on 31 March 2021 and is solely responsible for the information contained therein. Distributed by Public, unedited and unaltered, on 01 April 2021 13:25:01 UTC.