Fortune Minerals : Q3 September 30, 2021 MD&A (PDF 186 KB)

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS

AND RESULTS OF OPERATIONS

Three and nine months ended September 30, 2021

This Management's Discussion and Analysis of Financial Conditions and Results of Operations ("MD&A") of Fortune Minerals Limited ("Fortune" or the "Company") is dated November 15, 2021 and should be read in conjunction with the Company's unaudited interim condensed consolidated financial statement and the notes thereto for the three and nine months ended September 30, 2021 and with the annual audited consolidated financial statements and the notes thereto for the year ended December 31, 2020, prepared in accordance with International Financial Reporting Standards ("IFRS"). This discussion contains certain forward-looking information and is expressly qualified by the cautionary statement at the end of this MD&A. All dollar amounts are presented in Canadian dollars unless indicated otherwise. Unless the context otherwise requires, the terms "Fortune" and "the Company" where used herein refer to Fortune Minerals Limited and its subsidiaries on a consolidated basis.

SUMMARY OF QUARTERLY RESULTS

The following table provides selected consolidated financial information that is derived from the unaudited interim condensed consolidated financial statements and audited consolidated financial statements of the Company. The amounts represent the three-month periods ended:

		2021			2020		2019
	Sep-30	Jun-30	Mar-31	Dec-31	Sep-30	Jun-30	Mar-31Dec-31
Revenue and Other	86,040	7,103	7,001	5,461	49,104	22,207	26,589	12,600
Income
Net income (loss)	759,394	1,021,488	(3,813,558)	(436,621)	(181,619)	(1,057,014)	(40,405)	1,196,754
Basic and fully diluted	-	-	(0.01)	-	-	-	-	-
income (loss) per common
share(1)

Notes:

1. The sum of quarterly income (loss) per common share for any given period may not equal the year-to-date amount due to rounding.

Fortune has undertaken the following activities during the nine months ended September 30, 2021 in support of corporate financing initiatives and its wholly owned NICO cobalt-gold-bismuth-copper deposit and proposed mine ("NICO") in the Northwest Territories ("NWT") and a related hydrometallurgical refinery ("Refinery") proposed to be constructed in southern Canada (collectively, the "NICO Project"), as well as permitting and optimizations to produce a more financially robust development:

• The Company is assessing a number of sites to build the Refinery in southern Canada to process NICO metal concentrates to value-added products;
• Fortune is particularly focused on evaluation of brownfield locations with existing facilities and Municipal planning approvals that could materially reduce capital and operating costs for the NICO development;
• Fortune is engaged with various municipal, territorial, provincial and federal governments to attract political and financial support for the vertically integrated NICO Project and enable the respective jurisdictions to participate in the supply chain for Critical Minerals needed in new technologies and the growing green economy;
• Fortune continues to review the engineering and execution plans for the NICO Project to assess various opportunities to mitigate capital cost escalation and accelerate processing of higher margin ores to improve project economics;
• The Company filed its final report for the Government of the Northwest Territories ("GNWT") Mining Incentive Program ("MIP") grant received in 2020. The remainder of $21,600 has been received;
• The Company applied for and received a similar MIP grant from the GNWT in 2021 in the amount of $144,000 to support a drill program following up on the geophysical anomalies identified in 2020. As of September 30, 2021, $122,400 has been received;
• The Company is currently conducting this drill program testing for possible extensions to the NICO deposit and the Peanut Lake and Ralph Zones, and to determine if mineralization identified in a road cut continues to depth. Fortune expects to complete this drill program at the end of November;

Fortune Minerals Limited

Management's Discussion and Analysis of Financial Conditions and Results of Operations Three and nine Months Ended September 30, 2021

• The Company has applied for an additional $100,000 MIP grant eligible only to advanced exploration projects. If it is successful in receiving these funds, they would be used to support drilling additional holes to augment the current drill program; and
• The Company continues to compile and review capital and operating costs for the planned NICO Project development to make a more financially robust project.

OVERVIEW

Fortune's vision is to be a recognized developer, miner, processer and refiner of Critical Minerals needed in new technologies and the growing green economy, together with gold and other by-products contained in the Company's mineral deposits. Supporting the vision is Fortune's mission to profitably produce specialty and precious metals to meet the needs of our customers and partners, and to attract and develop an exceptional team of people motivated to acquire, explore, develop, mine and reclaim resource properties in a safe and responsible manner. The Company's most significant asset is the NICO Project.

The Canadian and United States ("U.S.") governments have signed a Joint Action Plan on Critical Mineral Collaboration to enable more North American production of certain minerals identified by the U.S. Government as critical to economic and national security. Minerals considered critical for this purpose have essential use in important industrial and defense applications, cannot be easily substituted by other minerals, and their supply chains are threatened by geographic concentration of production and/or geopolitical risks and/or are produced in jurisdictions with poor environmental social governance ("ESG") performance or values. Cobalt and bismuth are identified as Critical Minerals on the U.S. and European Union ("E.U.") Critical Minerals Lists. On March 12, 2021, Natural Resources Canada released the Canadian Critical Minerals List which also includes cobalt and bismuth as well as copper. Fortune has been in discussions with the Canadian, U.S. and E.U. governments and Provincial governments about potential financial support for the NICO Project development.

NICO Project

Fortune continues to advance its wholly-owned NICO Project and the Company's business activities have been focused on certain priority critical path activities required to advance permitting and financing for the planned development. The NICO Project comprises a proposed open pit and underground mine and a mill and concentrator in the NWT, with a related Refinery to be located in southern Canada. The Refinery was previously planned to be constructed at a site in the Rural Municipality of Corman Park in Saskatchewan, ("Saskatchewan Metals Processing Plant" or "SMPP"), but alternative locations are now being evaluated, particularly brownfield sites with existing facilities that could materially reduce capital costs for the planned development.

Before completing an updated Technical Report for the NICO Project, Fortune has been assessing a number of optimizations it has recognized to make a more financially robust project that include:

• A new Mineral Resource block model with a more constrained approach to the mineralization interpolation boundaries to reduce internal and external dilution and differentiate higher grade resource blocks for earlier processing;
• The block model has also identified some additional high grade blocks as well as mineralized material at the volcanic sedimentary rock interface that were not included in previous Mineral resource estimates;
• The grade interpolation wireframe boundaries were also extended to surface where the deposit is known to outcrop and to depth where the gold zone had been too abruptly terminated;
• A new mine plan and schedule has been completed based on the new Mineral Resource model with a re- optimized open pit shell and an expansion to the selective underground mining of gold-rich ores located close to the existing decline ramp for processing in the first three years of the planned mine life; and
• The open pit mine fleet has been amended with smaller equipment to reduce dilution with waste rock and match the lower mining rate; and
• The Company is reviewing equipment selections to reduce capital costs.
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Fortune Minerals Limited

Management's Discussion and Analysis of Financial Conditions and Results of Operations Three and nine Months Ended September 30, 2021

The Tlicho all-season road, a 97 km two-lane public highway from Highway 3 to the community of Wha Ti (the "Tlicho Road"), is essentially complete and is scheduled to open November 30, 2021. This will enable the Company to align the construction schedule for the mine with the availability of the all-season road eliminating construction over winter ice roads, reducing the construction period and capital costs for facilities and equipment that will no longer be required as well as mitigating construction supply chain risks.

Fortune has experienced personnel focused on advancing the NICO Project towards commercial production, while also minimizing the risks associated with its development. Fortune is committed to developing its project in a socially and environmentally responsible manner. Fortune continues to work with a number of private sector companies and potential strategic partners interested in the Critical Minerals and/or the gold contained in the NICO Project.

In light of the foregoing, the Company believes that the development schedule for the NICO Project can be aligned with the expected increase in the deficit in cobalt supply due to increasing demand for batteries in electric vehicles, portable electronics and stationary storage cells and mitigate government concerns over supply chain issues related to Critical Minerals. Fortune will also produce environmentally friendly bismuth metals and oxide used in the automotive and pharmaceutical industries and the growing demand as a non-toxic and environmentally safe replacement for lead. The NICO Project will be a significant producer of gold, and produce copper as a minor by- product. Fortune will be able to demonstrate supply chain transparency and custody control of metals from ores through to the production of value added products and mitigate risks from geographic concentration of supply from the Democratic Republic of the Congo and China.

Background

The NICO Project was engineered in the Front-End Engineering and Design study and a Technical Report entitled "Technical Report and Updated Mineral Reserve Estimate and Front-EndEngineering & Design ("FEED") Study on the NICO Gold-Cobalt-BismuthDeposit, Mazenod Lake Area, Northwest Territories, Canada" dated July 2, 2012 (the "2012 FEED Study") is filed on SEDAR at www.sedar.com by the Company pursuant to National Instrument 43-101.

In 2014, a Feasibility Study (the "2014 Feasibility Study") was prepared for the NICO Project based primarily on the 2012 FEED study as well as some subsequent improvements to the project and a proposed transaction to develop the asset with Procon Group ("Procon"). The 2014 Feasibility Study was summarized in a Technical Report reflecting the planned development, dated May 5, 2014, prepared by Micon International Limited ("Micon") and entitled "Technical Report on the Feasibility Study for the NICO Gold-Cobalt-Bismuth-CopperProject, Northwest Territories, Canada" (the "Technical Report") was also filed on SEDAR.

In 2018, Fortune engaged Hatch Ltd. ("Hatch"), Micon and P&E Engineering Consultants Inc. ("P&E") to produce an updated study of the economics for the NICO Project to support its discussions with potential strategic partners. The study contemplated an approximately 30% expanded mill throughput rate of 6,000 tonnes of ore per day ("tpd"), up from the 4,650 tpd rate used in the earlier study. The updated study also planned to assess some process improvements. After assessing the indicative economics of the expanded 6,000 tpd mill throughput rate, the Company concluded that the additional capital required to construct a larger project would not justify the mill rate expansion at prevailing cobalt and bismuth prices. Consequently, work on the expanded, 6,000 tpd mill throughput rate study was terminated and work was refocused back to the 4,650 tpd mill throughput rate, which was validated by production rate sensitivities. The sensitivities also confirmed that a combined open pit and underground approach to the mine plan in the early years of the mine life would produce a more attractive indicative rate of return by enabling earlier access to deeper, gold-rich ores in the deposit.

On May 1, 2015 the Company's wholly-owned subsidiary, Fortune Coal Limited ("FCL") and POSCO Klappan Coal Ltd., FCL's joint venture partner in the Arctos Anthracite Joint Venture ("AAJV"), sold their interests in the coal licenses comprising the Arctos anthracite coal project in northwest British Columbia to British Columbia Railway Company for $18,308,000. The AAJV partners maintain the exclusive right to purchase back the coal licenses at the same price for a 10-year option period, which expires on May 1, 2025. On March 31, 2017, the

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Fortune Minerals Limited

Management's Discussion and Analysis of Financial Conditions and Results of Operations Three and nine Months Ended September 30, 2021

Government of British Columbia imposed a 20-year moratorium on major industrial development within parts of the Klappan area. During the 10-year option period currently in effect, the coal licenses are excluded from this moratorium on industrial development within the Klappan area.

RESULTS OF OPERATIONS

Summary

The Company's net income/loss for the three and nine months ended September 30, 2021 was a net income of $759,394 and a net loss of $2,032,676, respectively, or $0.00 and $0.01 per common share compared to a net loss of $181,619 and $1,279,038, respectively, or $0.00 per common share for the same periods in the prior year. The significant change year over year is primarily due to the change in fair value related to derivative liability as discussed in "Expenses" below.

Revenue and Other Income

Revenue and other income increased in 2021 to $86,040 and $100,144 for the three and nine months ended September 30, 2021, respectively, compared to $49,104 and $97,900 for the same periods in the prior year. The increase is primarily the result of an increase in the recognition of flow-through share premium income during the period offset by a decrease in interest income earned on cash and cash equivalents.

Expenses

Expenses, excluding change in fair value related to derivative liability, increased in 2021 to $612,596 and $2,072,511 for the three and nine months ended September 30, 2021 compared to $517,894 and $1,802,838 for the same periods in the prior year.

The increase year over year is primarily attributable to: (i) an increase in stock-based compensation due to a stock option grant in January 2021; and (ii) an increase in interest expenses related to interest accrued on the Company's long-term debts. This increase was offset by a decrease in general and administrative expenses for the same period.

The change in fair value related to derivative liability recognized a gain of $1,285,950 for the three months ended September 30, 2021 and a loss of $60,309 for the nine months ended September 30, 2021 compared to a gain of $287,171 and $425,900, respectively, for the same periods in 2020.

Deferred Taxes

The Company has not recognized a net deferred income tax recovery or provision for the three and nine months ended September 30, 2021 and 2020. During the nine months ended September 30, 2021, the Company recognized

1. $543,000 from the estimated tax loss; (ii) $171,000 for tax rate difference; and (iv) $26,000 for non-taxable flow- through share premium resulting in a tax recovery which was offset by: (i) a tax provision of $477,000 for a loss carryforward not recognized; (ii) $255,000 for non-deductiblestock-based compensation and other expenses; and

1. $8,000 for non-deductible change in fair value of derivative.

During the same period in 2020, the Company recognized (i) $336,000 from the estimated tax loss; (ii) $174,000 for tax rate difference; (iii) $113,000 for non-deductible change in fair value of derivative; and (iv) $22,000 for non- taxable flow-through share premium resulting in a tax recovery which was offset by: (i) a tax provision of $495,000 for a loss carryforward not recognized; and (ii) $150,000 for non-deductiblestock-based compensation and other expenses.

During the three months ended September 30, 2021, the Company recognized (i) $621,500 for a loss carryforward not recognized; and (ii) $22,500 for non-taxableflow-through share premium resulting in a tax recovery which was offset by: (i) $370,000 for non-deductible change in fair value of derivative; (ii) $212,000 from the estimated tax

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Fortune Minerals Limited

Management's Discussion and Analysis of Financial Conditions and Results of Operations Three and nine Months Ended September 30, 2021

loss; and (iii) $62,000 for non-deductiblestock-based compensation and other expenses. During the same period in 2020, the Company recognized (i) $150,000 for non-deductible change in fair value of derivative; (ii) $$44,500 from the estimated tax loss; (iii) $15,500 for non-taxableflow-through share premium; and (iv) $1,000 for tax rate difference resulting in a tax recovery which was offset by: (i) $159,000 for a loss carryforward not recognized; and (ii) $52,000 for non-deductiblestock-based compensation and other expenses.

A valuation allowance of $17,534,000 has been recognized related to the uncertainty of realizing the benefit of deferred income tax assets in future years.

Cash Flow

Cash used in operating activities during the three and nine months ended September 30, 2021 was $5,592 and $502,784 compared to $178,484 and $364,024, respectively, for the same periods in 2020. The increase in use of cash in operating activities year over year is mainly attributed to a significant decrease in the change in accounts receivable from the prior year.

Cash used in investing activities was $268,581 and $331,566 compared to $166,271 and $524,732 for the three and nine months ended September 30, 2021 and 2020, respectively. This decrease is related primarily to a decrease in expenditures of capital assets included in mining properties and exploration and evaluation expenditures due to a decrease in activity on the NICO Project, offset by a receipt of $45,000 for a return of reclamation security deposit.

The NICO Project, and the Company's other exploration projects are classified as exploration and evaluation stage projects for accounting purposes. Exploration and evaluation cash expenditures incurred by Fortune on its properties during the three and nine months ended September 30, 2021 were $236,555 and $306,439, respectively, and were spent on the projects as follows:

	Three months ended	Nine months ended
	September 30, 2021	September 30, 2021
NICO	$ 233,752	$ 303,636
All Other Projects	2,803	2,803
Total cash exploration and evaluation expenditures	$ 236,555	$ 306,439

For comparison, exploration and evaluation expenditures incurred by Fortune on its properties during the three and nine months ended September 30, 2020 were $162,117 and $504,653, respectively, and were spent on the projects as follows:

	Three months ended	Nine months ended
	September 30, 2020	September 30, 2020
NICO	$ 159,315	$ 500,102
All Other Projects	2,802	4,551
Total cash exploration and evaluation expenditures	$ 162,117	$ 504,653

As of September 30, 2021, the Company had received $21,600 representing the remainder of the MIP grant awarded in 2020 and was awarded a $144,000 MIP Grant in May 2021, of which $122,400 has been received. The Company has elected to present these government grants as a reduction to exploration expenditures and is included in the line "mining properties" on the consolidated statements of financial position.

Cash provided (used) by financing activities increased to $1,477,706 and $2,008,961 compared to $(2,311) and $27,689 for the three and nine months ended September 30, 2021 and 2020, respectively. Cash provided in 2021 was a result of the issuance of units, the exercise of stock options and warrants and the issuance of debt. Cash provided in 2020 related to the receipt of a government loan.

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